Nfo Sample Content Booklet

8/18/2019 Nfo Sample Content Booklet

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SAMPLE CONTENT BOOKLET

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01CHAPTER

GRAND NATIONS AND

HISTORY OF FINANCE

Conceptual Framework of History and Finance

Powerful Nations and Story of Finance

Spanish Case Study:Story of Ination and Hyperination

LEARNING OBJECTIVES

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National Finance Olympiad 6

For a nancially and

economically strong India,we require a robust andrespected currency. Our

middle class is the keyto exponential economic

growth. In India, thecurrent middle class

population of 160 millionis expected to grow byanother 100 million by2015 (NCAER Report,2011). The difference

between mere sustenance

and prosperity will beknowledge of utilizingmoney. Better savings,

better investments, betterbudgeting will lead tonancial welfare and

creation of enterpriseswhich are value based

and will lead to a grander India. Corruption has

tarnished our country’simage. With adequate

nancial knowledgeand planning, the Indiancommunity would earn

passive income (throughinterest, dividends, rents

etc.) and would be moreethical, overall improving

the economic image ofour nation.

Today the dollarof United States of

America earns thatrespect as a currency.Gold, as you may nowunderstand has always

been considered as a

trustworthy commodityfor exchange andtherefore is considered

a safe investment.

The Ascent of Man, a compelling work by JacobBronowski was rst televised on BBC in 1974. The Ascentof Man explores the evolution of man from proto-ape,talks of early human migration, provides a foundationfor the development of tools, architecture, sculpture, re,metals and of course alchemy. It then moves on to thecreation of mathematics, astronomy, industrial revolutionand physics.

The Ascent of Man is arguably one of the nest works onhistory and provides a historical surmise of the importanceof money for the development of all explorations.Infact, it would not be unfair to say that developmentof a money system preceded any form of medieval –

modern exploration and the presence or absence of thesame caused success or failure of any such explorativeendeavor of humankind.

History taught us that great nations were built eitherthrough war (example Alexander’s Greece), throughmessage of peace (example Ashoka’s India) or throughnancial strength (example Croesus’ Lydia). Of the three,it was Croesus’ principle of utilising nancial strengthto create formidable nation which requires greater

discussion.Croesus in 550 BC, created a system of separating goldfrom silver ore, which created trust on his kingdom’s goldcoins and led the world to trade on his gold coins orhis kingdom’s currency. Lydia (now represented as areasof East Turkey) was arguably the rst nation to haveminted gold coins and silver coins. Trade had developedworldwide then and the coins printed at Lydia becamea symbol of trust. Croesus’ rise was phenomenal. Todayalso Croesus’ name is synonymous with extreme wealth.

Lydia, became one of the most wealthy and powerfulnation until Cyrus defeated Croesus.

You would later read on of strong and robust monetarysystems that through the history have created variouspowerful nations across the globe. In subsequent pagesyou would also see how a strong monetary system ledto nations winning wars and how misuse of such systemscreated internal rife, economic anarchy and evenrevolutions. S a

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There is a peculiarity about history. All developmentsin the world have been due to a necessity to improveupon existing orders. These developments in some casescreated positive evolutionary impacts or in some casescreated regressive impacts. To grasp any concept ordevelopment, if the need for which it was developedis known, the concept tends to get hammered in us. Forexample, if we understand the need for the developmentof a telegraph it would be easier for us to understandand appreciate its development and consequently itsconcept.

“Who could better explain the invention than the inventorhimself”

It is said that the rst great invention developed byEdison in Menlo Park (Menlo park is incidentally whereGoogle was also born) was the tin foil phonograph.While working to improve the efciency of a telegraphtransmitter, he noted that the tape of the machine gaveoff a noise resembling spoken words when played at ahigh speed. This caused him to wonder if he could recorda telephone message. He began experimenting withthe diaphragm of a telephone receiver by attaching a

needle to it. He reasoned that the needle could prickpaper tape to record a message. His experiments ledhim to try a stylus on a tinfoil cylinder, which, to his greatsurprise, played back the short message he recorded,“Mary had a little lamb.”1

Similarly, to understand ination, one can just look backat history and argue that one of the rst recordedinationary crises in the world may have been in Spainafter its conquest of South America. Not only does thishistorical fact make for an exciting reading but also

provides a base for understanding ination.

“Ination in its easiest form may be dened as too muchmoney chasing too few a goods.”

The Spanish conquest of South America led to thediscovery of Peruvian mountains rich in Gold and Silverfor the world. The natives Incas, who were socialist innature, had developed a robust barter system andan advanced agricultural system. Although, the Inca’s

were the real owners of those gold and silver mines butdue to their economic structure they never realized theimportance of gold and silver which the Spaniards wereeasily able to exploit. It was in 1545 that an American

‘Mary had a little lamb’- Why is history so

important?

Are you angry that theworld is so unfair?

Infuriated by fat-cat

capitalists and billionbonus bankers?Throughout the historyof western civilization,there has been a recurrenthostility to nance andnanciers, rooted in the idea

that those who make theirliving from lending moneyare somehow parasitical

on the real economicactivities of agricultureand manufacturing. Thishostility has three causes.

It is partly because debtorshave tended to outnumbercreditors and the formerhave seldom felt for thelatter. It is also becausenancial crises and scandals

occur frequently enough tomake nance appear to be a

cause of poverty rather than prosperity, volatility ratherthan stability. And it is partlybecause, for centuries,nancial services in allcountries all over the worldwere disproportionately

provided by members ofethnic or religious minorities,

who had been excludedfrom land ownership or

public ofce but enjoyed

success in nance becauseof their own tight knitnetworksof kinship and trust.

-Adapted from‘The Ascent of Money’by Niall Ferguson(Penguin 2009)

1http://inventors.about.com/library/inventors/bledison.htm, Mary Bellis

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Indian named Diego Gualpa found the silver mountain ofPotosi, now in Bolivia. This discovery led to the immediatemining rush amongst the Spaniards who were rulingthose regions of South America. The Incas not only losttheir complete independence but were also subjectedand exploited to work in those mines.

Like Lydia of 550 BC, Spain by 1550 AD was one ofthe most economically powerful nations due to theirexploitation of South American resources and the mainore was Silver found at Potosi.

And what rises astronomically tends to fall. With sucha huge reserve of silver and gold coins, the Spaniards

were plush with funds. But there was a catch. Spaniardslike other Europeans were warring for better part ofthe 16th century. There had been little emphasis onproduction and agriculture. Therefore the supply ofgoods and services was limited.

Now with their new found wealth after the conquest ofSouth America, Spaniards had enough gold and silverto purchase enough ‘need based’ and ‘luxury’ productsand services for themselves. The catch unfortunately was

limited supply of goods and services and the problemwas magnied by further wars.

It is notably a classical case where too much moneychased too few a products and services. The pricesstarted escalating and Spain was engulfed with Inationand later on Hyper Ination. Ination throughout Europein the sixteenth century was a broad and complexphenomenon.

In Spain, its main cause was arguably the ood of bullion

(precious metal coins) from the Americas, along with population growth, and government spending.

In-fact in 1557, due to rising military costs andhyperination, Spain led for its rst Bankruptcy orMoratorium. Spain to meet its burgeoning governmentexpenditures, started borrowing from neighboringEuropean nations, started defaulting on its payment andconsequently went bankrupt.

By 1570, Spain resurfaced again on the back of Moneyand this time it was due to the creation of their currencycoins called the Pieces of Eight. Pieces of Eight werealso silver coins that were mined out from the large

In Spain, its (ination’s)

main cause was arguablythe ood of bullion

(precious metal coins) from

the Americas, along with population growth, andgovernment spending2.The Flood of Bullion, as

you would now appreciatewas due to the Spanishexploitation of South

American resources. Population growth alsoadds to ination. The

supply is limited and thedemand keeps increasing.

So does Government spending. Governmentexpenditure tends to

put more money in theeconomic system, therebyfuelling ination. Had

the expenditure beenfor increase of supplyof products or services,it would have been adifferent case. But in ourexample, the SpanishGovernment spendingwas basically militaryexpenditure, whichcreated further inationary

pressures.

Such was the dominance

of the Spanish Pieces ofEight that when the Britishauthorities in Australiawanted to create a localcurrency, they convertedthese Pieces of Eight intove shilling coins.

2Europe and England in the Sixteenth Century, T. A. Morris, 1998, pg 121-122

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Discovery of the Gold rich Potosi Mountains, Bolivia, led to massivemining rush among the Spanish. With the accumulation of huge reservesof the most precious metal, provided the Spanish with uncontrolledwealth supply. Stormed by the rising military cost because of theirongoing wars, soon they became a victim of hyperination and began

borrowing from other countries. Consistently defaulting on their debtrepayment, In 1557, Spain went bankrupt!

Spanish Colonies (16th Century)

reserves of Potosi. Pieces of Eight became the trustedcoin for trade and maintained its dominance well into thenineteenth century.

For Finance acionados, Potosi still remains proverbialfor its wealth. Spaniards today still say something is ‘valeun Potosi’ which means ‘worth a fortune3.

3“A History of the world in 100 objects”,Neil MacGregor, 2010, pg 522

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Glossary

Alchemy: Alchemy is an inuential philosophicaltradition whose early practitioners’ claims toprofound powers were known from antiquity.Practical applications of alchemy produceda wide range of contributions to medicineand the physical sciences.

Croesus: Croesus was the king of Lydia from 560 to547 BC until his defeat by the Persian kingCyrus. Lydia (now eastern parts of Turkey)was arguably the richest nation during hisreign.

Cyrus: Cyrus the Great (576 BC–530 BC) was

the founder of Achaemenid Empire. Hedefeated Croesus and controlled his empiretill 530(BC).

Monetary A monetary system is a scheme developed bySystem: a government to facilitate exchange. It also

provides a means to generate and measurewealth and debt.

Incas: The Inca Empire was the largest empire in

pre-Columbian America. The Inca civilizationarose from the highlands of Peru sometimein the early 13th century. The Inca Empirewas the last sovereign political entity thatemerged from the Andean civilizationsbefore conquest by Spaniards.

Peru: Peru is a representative democratic republicdivided into 25 regions in the continent ofSouth America.

Need Base Products that are essentially required.Products:

Luxury Luxury goods are products and services thatProducts: are not considered essential.

Ination: Ination is a general rise in prices of goodsand services. Ination results in loss of valueof money.

Hyper Extremely rapid or out of control ination.Ination: Hyperination is a situation where the priceincreases are so out of control that theconcept of ination is meaningless. S a m p l

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Bankruptcy: A legal proceeding involving a person orbusiness that is unable to repay outstandingdebts.

Moratorium: A period of time in which there is a suspensionof a specic activity until future eventswarrant a removal of the suspension or issuesregarding the activity have been resolved.

Pieces of Pieces of eight are historical Spanish dollarEight: coins minted in the Americas from the late

15th century through the 19th century. Madeof silver, they were in nearly worldwidecirculation by the late 19th century and

were legal currency in the United States until1857.

Acionado: A person who is very knowledgeable andenthusiastic about an activity, subject, orpastime.

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02CHAPTER

CREDIT, INTEREST, LOANS,

DESIRES & ROTTING FISHES

- It is all in here!

Conceptual understanding of “Barter System”

Evolution of Credit & Interest

Evolution of “Letter of Credit” Conceptual understanding of “Loan for consumption”

and “Loan for production”

Evolution of “Saving”

LEARNING OBJECTIVES

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Excess has always created debacles. We saw in theprevious chapter when Spain had excess of coins, itresulted in ination and an economic debacle. TheFrench Revolution was also caused due to a currency andstock mismanagement leading to a nancial misfortune.Since 2008, we have witnessed a credit chaos, whereexpansion of baseless credit facilities almost createdanother Depression worldwide. Although, thesediscussions merit further explanation which we wouldundertake subsequently, we must study and understandthe evolution and the concept of the word credit.

Credit facilities have been the backbone of any economicsystem. Assume a situation, when there was no money

and we all lived our lives on barter. A situation wherefew individuals were involved in agricultural activities,few individuals were shing and few perhaps hunting.The hunters gave away their meat for sh from theshermen and the shermen gave away their shes forsay barley. In simplest terms this is what a barter systemor an exchange system looked like.

From being barbaric to being civilized, humans havecome a long way. Civilization in its simplest form ‘civility’

reects the ability of humans to co-exist in groups anddevelop economically, socially and culturally. Oneof the earliest known civilizations, the MesopotamianCivilization, changed the way humans lived. It marked thebeginning of social order and the beginning of a changefrom individual sustenance to community sustenance. Thebackbone of this community co-existence was the Bartersystem.

Barter system for its success had a unique requirementof a single authority in case of defaults on the barter.

What if our above mentioned farmers, required shesbut had to wait for the harvesting of barley to initiatethis required exchange? Also what if the farmer gaveaway the barley but the sherman refused to providethe shes?

This meant that the authority or the then governmentwas required not only for providing justice but also forproviding solutions related to immediate consumptionfor a future promise of exchange. The solution lay in the

development of credit and interest system.Marc Von De Mieroop in the book ‘The origins of Value- The Financial Innovations that created Modern Capital

Creditum, a Latin wordfor Credit reected the

amount of money withwhich an individual or a

group could be trusted.The concept was simpleone could borrow today

and repay later. Thisnaturally would meanthat the lender would

be undergoing a certainamount of risk of losing

the money.For this risk appetite, the

lender should be rewardedin some manner.

This reward came to beknown as Interest.

Do You Know!!

In India, we now have acreditworthiness check

body called the CIBIL.

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Gold@15154The Origins of value: The Financial Innovation that Create Modern

Capital Market.- William N Goetzman, K Geerth Rouwenhort Pg 17-25

Markets’ discusses the aspect of ‘Interest’ based on thematerials from the period of 3200-1600 BC, as theywere found in South Mesopotamia. Historians concur that‘Credit’ and ‘Interest’ have therefore been pivotal for thedevelopment of civilizations.

From the same period it becomes evident that any nancialobligation that needed to be fullled in the future wasconsidered a loan. A promise to deliver wooden objectsat a certain point in the future, for example was alsophrased as Loan.4

The image above shows a red clay with cuneiform inscription of

around 1820 BC. The text records the loan of 9.33 grams of silver toNabi-Ihshu from Sharmash. The tablet stipulates that the loan will be

repaid with ‘Interest’

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A loan for consumption is a contract under which the lender providesthe borrower with consumable goods. And the borrower is obligated toreturn the goods with specied quantity & quality, within a given time

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The loan documents as shown in the adjacent image weregenerally red clay tablets with cuneiform inscriptions.Because of the nature of the loan contract as a documentattesting that something was owed, it could be passed onfrom the original creditor to another person. This meantthat the loan document could also act as a ‘Letter ofCredit’5.

Over the 3500 years we still utilize the same concepts.And it is of no surprise as human necessities, althoughevolved, fundamentally remain the same. The farmerstoday also borrow from Micro credit agencies to sowseeds, the manufacturer borrows from banks to purchaseraw material and we as consumers tend to borrow for

fullling either our necessities such as homes or educationor for fullling our wants and luxuries.

The interest paid on these loans are now marketdetermined and regulated and as you can nowappreciate are a reward that we pay to the nancialinstitutions for the risk that they undertake while providingfor a loan against our creditworthiness.

The concept of Loan can broadly be divided as Loans for

Consumption and Loans for Production.Historically and even today, loans for consumptionpurposes are condemned as imprudent. Going by thesame logic you may raise a moral question over theusage of personal credit cards.

Loans for production can be explained as borrowingsfor commercial purposes and are expected to generatereturns in future. Logic and ethics call for a prudentbehavior in dealing with such returns as the allocation of

such returns should be rst towards the repayment of theborrowed loans.

Desire has no barter. As humans, we moved from thebarter system to a more elaborate nancial system andso did our desires, which moved with the same pace andelaboration.

Because the desire to consume often does not match thetiming of the receipts of income, individuals regularly

engage in saving (consuming income from the past)and borrowing (consuming income from the future). Andas mentioned above, saving is a more prudent form ofmeeting desire than borrowing for consumption.

In the third millennium BC, Mesopotamians used bothgrains and ingots of silveras mediums of exchange.

The customary interestrates were 33.33% perannum for loan of grainsand 20% per annum forloan of silver.

The Mesopotamian codeof Hammurabi (1800 BC)made these rates legalmaximums, establishing a

tradition of interest rateregulations that has lastedto the present.

- Homer, Sidney, RicharSylla. A history of interestrates, 1996.

In the current context,the central bank managesthese interest rates. In

India, the role of CentralBank is played by theReserve Bank of India.

What Hammurabi wrote is still followed, almost 3000 years later!!

5The Origins of value: The Financial Innovation that Create Modern

Capital Market.- William N Goetzman, K Geerth Rouwenhort Pg 17-25

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It is indeed hard to imagine what the regularMesopotamian (Sumerian) sherman who wanted barleymust have done. The choice was either storing shes(letting them rot without the modern facilities) or borrowin lieu of a promise to supply shes at a later point oftime!

Credit, Borrowing, Loans and Interest form a backboneof our neo nancial systems but their roots are in history.Appreciating their necessity can further allow us torationalize on these concepts and perhaps but somewhatdifcult, allow us to rationalize our desires.

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Glossary

Risk: Risk is the chance that an investment’s actualreturn will be different than expected. Riskincludes the possibility of losing some or all

of the original investment. Risk of Risk of Capital is the risk of loss of theCapital: amount invested, faced by company / individual.

Risk of It is the risk of loss due to any change in theInterest: interest rates.

Risk of Risk of time frame is the risk that anTime investment’s value will change according toFrame: the different intervals of time.

Probability: Probability is a measure of the expectationthat an event will occur.

Richter Richter scale is a Quantitative measureScale: of earthquake-strength (magnitude) that

indicates the seismic energy released by anearthquake at its epicenter (measured from adistance of 100 miles) on a 1 to 10 scale.

Pledge: Pledge is a cash deposit or placing of ownedproperty by a debtor (the pledger) to acreditor (the pledgee) as a security for aloan or obligation.

Default: Default is the inability to pay interest orprincipal when due. Default occurs when adebtor is unable to meet the legal obligationof debt repayment. Borrowers may defaultwhen they are unable to make the requiredpayment or are unwilling to honor the debtwithin a specied time period.

Sub-prime Subprime mortgage crisis is a set of eventsCrisis: and conditions that led to the late-2000s

nancial crisis, characterized by a risein subprime mortgage delinquencies andforeclosures, and the resulting decline ofsecurities backed by said mortgages. It allstarted in 2006 with US Market tumblingdown due to defaults by thesub-prime

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Money A money changer is a person / institutionchangers: which exchanges the currency of one country

for that of another, at a xed or variablerate.

Medici The Medici family was a political, bankingFamily: family & later a royal house. The family

originated in Mugello region and establishedthe Medici bank in Florence, Italy. It wasthe largest and the most respected bank inEurope during the 15th century AD.

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03CHAPTER

FUNDAMENTALS OF

BANKING SYSTEM

After reading this chapter you should be able to: Understand the background and need for

banking.

Understand the growth of Indian Banking

System

Understand present scenario and role of

Banks

Understand the prospects of banking

LEARNING OBJECTIVES

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Bank is a German word which means ‘to collect’. Themain function of the banks is collection of funds asdeposits.

According to the Indian Banking Companies Act 1949,“A bank is an institution accepting, for the purpose oflending or investment, in deposit money from publicrepayable on demand or otherwise, withdrawal bycheque, drafts, order or otherwise”.

Need for BankingBanks are needed in order to:• Provide security to your funds

• Saving and Investing• Acquire funds/loans The banks we see today were not so before 2-3decades. Even the evolution of banking is not so old.

History of Banking SystemThe history of banking begins with the banks ofmerchants of the ancient world, which made grainloans to farmers and traders. This began around 2000BC in Assyria and Babylonia.

Later, in ancient Greece and the Roman Empire, lendersaccepted deposits and provided loans to borrower.Modern banking was traced in medieval and earlyRenaissance Italy, Florence, Venice and Genoa. In the14th century, the Bardi and Peruzzi families of Florencedominated banking. The most famous bank of that erawas Medici Bank, established by Giovanni Medici in1397 BC.

The development of banking spread and the DutchRepublic was established in Amsterdam during the16th century. In the 20th century, with the help oftelecommunications and computing methodologies,banking operations changed dramatically.

Earliest forms of BankingThe earliest banks were used by rulers, exclusively.The wealth was deposited and kept in temples andtreasuries, and is believed that their money is keptsafely by GOD.

First joint – stock company,the Dutch East India

Company was founded in

1602.

Monte dei Paschi di siena is

the existing oldest private

bank in the world. It was

founded in 1472 by the

Magistrate of the city state

of Siena, Italy.

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Commercial banks are based on prot, while

cooperative banks are based on cooperativeprinciple.

Public Sector BanksThese banks are owned and controlled by thegovernment. Some of the public banks are – Bank ofIndia, Canara Bank, Dena Bank, State Bank of India,Punjab National Bank and Union Bank.

Private Sector BanksIn these banks majority of the shares are held by theprivate shareholders and not by government. Some of the private banks are – Axis Bank, HDFCBank, ICICI Bank, Indusland Bank and Kotak MahindraBank.

Foreign BanksIn this era of Globalization, many private banks showed

their interest in expanding their business globally toserve a large number of customers. Some of them are – American Express Bank, Barclays Bank, Royal Bankof Scotland, HSBC and Citibank.

Public Sector bank means

that goes public…

The shares are issued to

general public and the

government holds morethan 50% of shares.

Scheduled Banking Structure in IndiaReserve Bank of India

[Central Bank and supreme monetary authority of the country

Scheduled Commercial Banks Scheduled Cooperative Banks

Public Sector

Banks (27)

Private

Sector Banks

(25)

Foreign

Banks in

India (39)

Regional

Rural Bank

(357)

Scheduled Urban

Cooperative Banks

(53)

Scheduled State

Cooperative Banks

(31)

Nationalized

Banks (19)

State Bank of

India & its

Associates (7)

Old Private

Banks (17)

New Private

Banks (8)

Structure of Banking System in India

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Regional Rural BanksThese banks were set up with the aim to providecredit/loan for the agricultural and rural sectors. Some

of them are – Punjab Gramin Bank, Nagaland RuralBank, Meghalaya Rural Bank and Andhra PragathiGrameena Bank.

HOW BANKS WORK

DepositsDeposit is a sum of money placed or kept in a bankaccount, usually to gain interest.

What can be done

through banks

today?

Pay bills (electricity,

telephone, DTH)

Transfer money to any

part of the country/

world

Receive money from

any part of the

country/world

Carry out investments

Acquire Demat services

Acquire loans

Trade services

Foreign exchange

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Types of AccountsIn Indian Banking System, there are four types ofAccounts:

• Current Accounts• Savings Accounts• Recurring Deposit Accounts• Fixed Deposit/Term Deposits

Current AccountsCurrent Accounts are the most liquid deposit account.There is no limit prescribed for the number oftransactions in a day. Cheque book facility is providedto the account holder. No interest is paid by bankson these accounts. On the other hand, banks chargeservice charges on such accounts.

Users• Businessmen• Joint Stock Companies• Institutions• Prot making bodies

Savings AccountSavings Account is used to deposit money in a bankand earn interest over time. Banks are free to decidethe interest rate within certain conditions imposedby RBI. These accounts are one of the most populardeposits for individual account. Cheque book facility isprovided to the account holder.

Reserve Bank of India has prohibited banks to opensavings bank account in the name of any trading orbusiness concerns, whether such concern is proprietary,or partnership rm, or a company, or association.

Recurring Deposit AccountsRecurring Deposit Scheme aims at providing a personan opportunity to save regular monthly deposits ofxed sums over a period of time. It is most useful for thesalaried class. It is one of those time deposit schemes inwhich the customer has to deposit the agreed amount

every month.

SOME IMPORTANT

FACTS ABOUT BANKS

What is the minimum

deposit required foropening a FD

Rs. 10,000

What is the multiple in

which we can open a FD

There is no xed multiple.

What is the minimum

and maximum period

required for FD and RD For FD:

Minimum balance:

7 days

Maximum balance:

10 days

For RD:

Minimum balance 12

months

Maximum balance Upto

12 years

Is TDS (Tax Deduction at

source) applicable on FD

and RD?

Yes, as per Income

Tax Act, 1961 TDS is

applicable only on the

interest of FD but it is not

applicable on RD.

Do banks provide loans

on the security of FD?

Yes, upto 90%

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The advantages of the scheme over other schemes are:

• It contains an element of compulsion in savings

which is welcome to a certain class of depositors.

• Effective rate of interest works out to be higherthan the rate as applicable to term deposits.

Fixed Deposit Accounts/Term DepositsFixed Deposits are high-interest yielding depositsoffered by banks in India. The term “xed” in FixedDeposits denotes the period of maturity or tenor. So aperson needs to continue such deposits for the length

of time for which the depositor decides to keep themoney with the bank. However if depositor wants tobreak the deposit he can do so by paying a smallamount of penalty.

LIST OF RBI CHIEFS

Dr. Raghuram RajanSeptember 5, 2013 onwards

Dr. D. SubbaraoSeptember 5, 2008 to September 4, 2013

Dr. Y.V.ReddySeptember 6, 2003 to September 4, 2008 S a m p l

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Dr. Bimal JalanNovember 22, 1997 to September 5, 2003

Dr. C. RangarajanDecember 22, 1995 to November 21 1997

December 22, 1992 to December 21, 1995

S.VenkitaramananDecember 22, 1990 to December 21, 1992

R.N. MalhotraFebruary 4,1985 to December 21, 1990

A. GhoshJanuary 15, 1985 to February 3, 1985 S a

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Dr. Manmohan SinghSeptember 16, 1982 to January 14, 1985

Dr. I.G.PatelDecember 1, 1977 to September 15, 1982

M. NarasimhamMay 2, 1977 to November 30, 1977

K.R. PuriAugust 20, 1975 to May 1, 1977

N.C. Sen GuptaMay 19, 1975 to August 19, 1975 S a m p l

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S. JagannathanJune 16, 1970 to May 18, 1975

B.N. AdarkarMay 4, 1970 to June 15, 1970

L.K. JhaJuly 1, 1967 to May 3, 1970

P.C. BhattacharyyaMarch 1, 1962 to June 30, 1967

H.V.R. LengarMarch 1, 1957 to February 28, 1962 S a

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K.G. AmbegaonkarJanuary 14, 1957 to February 27, 1957

Sir Benegal Rama RauJuly 1, 1949 to January 13, 1957

Sir Chintaman D.DeshmukhAugust 11, 1943 to June 30, 1949

Sir James Braid TaylorJuly 1, 1937 to February 17, 1943

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Sir Osborne A. SmithApril 1, 1935 to June 30, 1937

LIST OF FINANCE MINISTERS

• Liaquat Ali Khan 1946-1947 (interim government)

• John Mathai 1948-1949• R. K. Shanmukham Chetty 1949-1951• Chintamanrao Deshmukh 1951-1957• T. T. Krishnamachari 1957-1958• Jawaharlal Nehru 1958-1959• Morarji Desai 1959-1964• T. T. Krishnamachari 1964-1967• Morarji Desai 1967-1970• Indira Gandhi 1970-1971• Yashwantrao Chavan 1971-1975• C. Subramaniam 1975-1977• Morarji Desai 1977-1979• Choudhary Charan Singh 1979-1980• Ramaswamy Venkataraman 1980-1982• Pranab Mukherjee 1982-1985• V.P. Singh 1985-1987• S.B. Chavan 1987-1990• Madhu Dandavate 1990-1991• Manmohan Singh 1991-1996

• P.Chidambaram 1996-1998• Yashwant Sinha 1998-2002• Jaswant Singh 2002-2004• P.Chidambaram May 2004 - Nov 2008• Manmohan Singh Dec 2008 - Jan 2009• Pranab Mukherjee 24th Jan 2009 - 26 th June

2012• Manmohan Singh 26th June 2012 - 31st July

2012• P Chidambaram 31th July 2012 - Till date S a

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04CHAPTER

BANKS AND THEIR

SERVICES

After reading this chapter you should be able to:

Know the concept of cheques

Understand the meaning and types of loans Know the concept of letter of credit

Understand the concepts of online banking

LEARNING OBJECTIVES

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In the earlier chapter, you have studied that you canmake deposits in the banks in various account schemesdepending on your needs. Here are some other services

offered by bank.

ChequeEarlier the payments were done through cash onlybut now there is no need to carry it in order to makepayments. You can directly pay through cheque. Acheque is a document that orders a payment of moneyfrom a bank account.

Types of Cheques

Bearer ChequeBearer cheque is a cheque on which the words “orbearer” appearing on the face of the cheque are notcancelled as well as not crossed. The amount can bepaid to any person who presents the cheque.

Order ChequeOrder cheque is a cheque on which the words “or

bearer” appearing on the face of the cheque arecancelled and “or order” is written. This type of thecheque is payable only to the payee.

Uncrossed/Open ChequeUncrossed cheque is one which is not crossed. It is alsoknown as open cheque. An open cheque can be abearer cheque or order cheque.

Crossed Cheque

Crossed cheque is one in which two parallel linesare drawn on the face of the cheque. In such typeof cheque the amount is credited only in the payee’saccount.

Post Dated ChequeIf a cheque is issued for a future date, it is known aspost dated cheque. These cheques are not cleareduntil the date comes. S a

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Cheque Clearing Process Suppose you got a cheque and now you want to encashit. You will simply go to your bank and present the

cheque to the banker. Then the bank will process thetransaction and give you the cash or add the amountof the cheque in your account. In case it is added toyour account then the balance in your account wouldbe: Previous amount + Amount of the cheque.

If you have done cheque payment then the otherperson would like to encash the cheque. Then yourbank will check whether you have sufcient amount inyour account, if there is sufcient amount then the samewould be deducted from your account balance andthen the balance in your account would be: Previousbalance – Amount of the cheque. In case you do nothave the required amount the cheque would not becleared and would be returned. Bank will also chargepenalty in case you have issued a cheque and you donot have sufcient amount in your account.

At present, the validity of the cheque is 3 months. It

means after receiving a cheque it needs to be clearedwithin 3 months otherwise it would be consideredcancelled.

LoansLoan is an arrangement to lend money to the borrower,which he needs to repay after a pre-determined timewith interest.

Banks have a specic process and customers have toprovide appropriate details before the bank conrmsor approves the loan. While requesting for a loan, thecustomer has to specically mention the purpose ofthe loan. It can be for personal uses (termed personalloan), or for buying a house or property (termed homeloan) or for studies (termed education loan). Banks alsoperform a background check of the customers to verifythat the details provided by the clients are correct.

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bank. These parameters mention the amount of theloan, the duration of payback, the methodology ofpayment, the interest rate applicable etc.

The bank also veries the background of the customerbefore approving a loan. This involves details likeproof of income, credit history and other details. Basedon this information, the bank decides an amount thatcan be granted as a loan.

Types of loans

I. Based on interest rate methodologyBanks offer loans with xed interest rates or variableinterest rates.Fixed interest means the interest rate would be xedand hence the monthly payment will stay the same forthe term of the loan.Banks offer variable interest rate loans, as well. Theinterest rate can change moving up or down causingthe borrower's payment to increase or decrease. This

type of interest rate is also called as variable interestrate.

II. Based on the type of securityWhen a larger amount of loan is allotted to a customer,the bank requires a ‘security or mortgage’. A mortgageis a conditional pledge of property to the creditor (inthis case, the bank is the creditor) as obligation beforerepayment of debt.Loans borrowed by a customer after pledging a

mortgage to the bank are termed as ‘secured loans’.Loans which do not require the mortgage are called asunsecured loans.

Key Differences between Secured orUnsecured DebtDebt nancing is secured or unsecured. Unfortunately,these terms don't mean how secure or unsecure thedebt is to the borrower, but how secure or unsecure the

debt is to the lender.

Some Do’s and Don’t’s

for taking a loan

Do’s

Always compare

the total amount

repayable.

Lower amount

repayable is always

preferred.

Inquire about penaltiesfor early repayments.

Don’t

Avoid taking a secured

loan.

Avoid taking a loan to

pay off previous debt.

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Secured Loans No matter what type of loan you take, you promise topay it back. With a secured loan, borrowers promise is

"secured" by granting the creditor a specic propertyor collateral.If customer defaults on the loan, then the creditor canrecoup the money by seizing and liquidating (sellingoff) the specic property that is used as collateral onthe debt.

Because the real value of collateral is critical to a securedloan lender, one can also expect a lender to minimizeits risk by conservatively valuing your collateral and bylending only a percentage of its appraised value. Themaximum loan amount, compared to the value of thecollateral, is known as the loan-to-value ratio.

For example, a customer applies for a loan from abank and is willing to give ‘gold’ as collateral. In thiscase, let’s say the price of gold is Rs. 30000/ 10 gmand the customer deposits collateral of 1 kg gold. Now,the customer would expect the loan amount to be Rs.

30 lacs. However, the lender would not give a loan ofthe complete amount. This is done with a low-risk viewthat the price of gold may also fall below Rs. 30000.In case the price of the collateral i.e. gold remains atRs. 30000 and the lender gives a loan of Rs. 30 lacsand the customer defaults on the payment, the lenderwould sell the 1 kg gold at Rs. 30000 and recover hismoney.

However, in case the customer defaults and the price ofgold has become Rs. 25000/ 10 gm then the value of1 kg gold will be 25 lacs. Here, the lender would facea loss of Rs. 5 lacs. Thus, the lender will not be able torecover the full amount he had granted as loan.

To avoid this risk, the lender does not offer loan equalto the full value of the mortgage, but offers a specicpercentage of it. In the above example, the lendermay offer 80% of the total mortgage value as loan.

Thus the maximum possible loan that can be borrowedwill be80% of 30 lacs = 24 lacs.

Unsecured Loans have

higher interest rates

than secured loans

because they are not

backed by collaterals.

Examples of Secured

Loans are Car loan,

Home loan, Loan

against property,

Secured business loansand many more.

Examples of Unsecured

loans are Personal

loans, unsecured

business loans, credit

card loans, bank

overdraft and many

more.

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This process is often called as ‘haircut’ and it helps toreduce the risk of the mortgaged asset’s price.

Unsecured LoansIn contrast with secured loans, your promise to repayan unsecured loan is not supported by granting thecreditor a mortgage or any specic property. Thelender is relying upon your credit worthiness andreputation to repay the obligation. The most commonform of an unsecured loan is a credit card.

While your property may not be at direct risk,defaulting on an unsecured loan does carry serious

consequences. True, the lender has no priority claim orauthority against any particular property if there isa default, but the creditor can try to obtain a legaljudgment against you.

EMI (Equated Monthly Instalment)The loan repayment in most cases happens in the formof EMI. It involves breaking up the large loan amountinto smaller parts and the borrower is expected to pay

each part every month over the duration of the loan.

Time FrameSecured loans may range anywhere from 1 to 30years, but it usually depends on the type of collateral,the preference of the buyer, and the bank policies.For example, typical auto loans are offered from 36to 72 months. Home loans, industry setup vacant landloans have terms usually from 5 to 30 years. Personalunsecured loans usually range from 12 to 60 months.

For instance, when a person takes a home loan from abank, the duration of the loan can be 20 years. Thismeans that every month, a particular EMI will be paidby the customer to the bank. Till the loan is paid-off,the bank keeps the home as mortgage.

How to choose which

type of loan you

should opt?

To make a choice of the

type of loan one must

think: Which one will save

rate of interest for me?

What is the purpose/

use of the loan?

For how much time I

need the credit?

Do I have any asset to

mortgage?

Am I willing tomortgage my asset?

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III. Based on the purpose of the funds:

Personal Loan

Personal loan is a short-term loan provided to meet outpersonal requirements like medical expenses, marriageexpenses, paying bills, etc. It is provided by keeping inmind the repaying capacity of the borrower.

Vehicle LoanVehicle loan is provided for purchase of car or othervehicles either for personal or business purposes.

Home LoanHome loans are provided for purchase of a new house/land or for construction of a house. Rate of interestcharged on these houses may be xed or uctuating.Fixed rate of interest – It remains xed throughout theperiod of loan

Fluctuating rate of interest – Interest rate changesaccording to the current rate in the market.

Business LoanBusiness loan is given to business by banks/individuals/organizations. It may be used to fund large capitalexpenditures or operations that a business cannotafford.

Holiday LoanHoliday loan is given to meet out the expenses of aholiday trip. It is given considering the nancial positionof a borrower to repay it.

Letter of Credit: One of the very important functions of banks is to act asan intermediary in case of domestic and internationaltrade.

Letter of credit is a Bank

Guarantee.

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An ATM is a plastic card with a MasterCard or Visalogo on it that is connected directly to your bankaccount. When you use it, money goes from your

account to the company you are paying. It can be usedwherever MasterCard or Visa cards are accepted,even overseas.

You can use debit cards in two ways:• To use your card at an ATM or a point-of-sale (POS)terminal at a store, you have to provide your personalidentication number (PIN).• You can also use your debit card at stores andrestaurants that accept these cards, without providing

a PIN. You will be asked to sign a receipt.

What is Debit card and Credit card?A debit card enables you to withdraw money (ormake monetary transactions) from your existing bankaccount. The amount that can be withdrawn is limitedto the amount of funds available in your account. A credit card enables you to withdraw money (or make

monetary transactions) by using borrowed money fromthe banks. You need not have the amount available inyour bank account. This is same as borrowing money ortaking a loan. According to the terms and conditions ofthe credit card issuance, the customer gets a specicnumber of days to repay the money that has beenborrowed using the credit card.

Issuing of credit cards is more risky as compared todebit cards, as there is a possibility that the customer

may default on the payment due. For this reason, thebanks also charge a higher interest for transactionsmade using credit cards.

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The Tea StallEconomics

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National Finance Olympiad5

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Nfo Sample Content Booklet

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