RBI Grade B 2019 Notificaton, Preparation, Books & Study Materials
PROMPT CORRECTIVE ACTIONS
What and Why?
In the recent past, most of us came across the news that some PSBs are under the PCA, RBI’s scanner.
What does PCA mean, what are the considerations to be taken into account for declaring a bank under PCA, what are the measures taken by the Central Bank on such banks are some of the topics we are going to discuss.
And to answer why, being a to-be banker you need to know what’s all happening in the world of banking and finance. They might not be much important to you today, but just knowing them is nothing wrong either! 📷;)
What is meant by PCA?
what does PCA mean, whose initiative is it and from when there was such framework available in our country.
PCA – Prompt Corrective Action
PCA framework is operational since December 2002
The revised guidelines with certain amendments were brought into force from 13th April, 2017.
PCA is an initiative by the Reserve Bank of India.
What is the need of PCA?
Is PCA really needed? Why does RBI initiate it??
To explain this, first let me give an example of Bank X, which has been doing business since years and has a capital of, say, Rs 100 Crore. After opening branches, it is obvious that people come to deposit with you and save their hard-earned money. And in this case Bank X received Rs 100 Crore in the form of deposits too! Now, what will bank X do? Will they keep this money with them in the safe and do nothing? If that’s the case, how are going to payback their depositors with interest? So, banks do lend the money to the needy with interest more than that on the deposits so that they can get some profit (obviously, banking is a business and we do need profits for us to run in the long term).
As per RBI’s policy, we can’t lend all the Rs 100 Crore. The banks have to keep aside or park some money with the RBI in the form of government securities, cash and gold (we better know them as Cash Reserve Ratio and Statutory Liquidity Ratio). In this case, let us assume that, summing up CRR and SLR together we have to park Rs 25 Crore with the central bank. This means that Bank X is eligible to borrow only Rs 75 Crore. After lending, there might a case arise where none of the lent money comes back to you, neither principal nor the interest. What does a bank do in such a case? How will bank repay the depositors? The first step banks take with the consent of the RBI is that, they will take the money they had parked with the RBI and repay them to the depositors. Even then if the shortage does fall, the bank takes money from their capital which was kept aside to repay the depositors.
Such situations lead to decline in the reputation of all the banks and there will be a crisis like situation where all the depositors will ask for repayment of their deposited money. To avoid such drastic situations, the apex bank initiated the PCA, where in it will be monitoring some key areas of all the banks and based on some trigger points it will take the banks under their scrutiny and focus on improvising the business and financial stability of those banks.
Definition of Prompt Corrective Action:
To ensure that banks don’t go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. The process or mechanism under which such actions are taken is known as Prompt Corrective Action or PCA.
What is the benefit of introducing PCA?
With banks coming under PCA, the Reserve Bank can concentrate on certain regulations or tighten some rules for those banks to get them back to financial stability.
It also allows the RBI to engage closely with the bank’s management in order to improve their financial health
When a bank is under PCA, does their normal operation get affected?
The answer is NO!! Under PCA, banks do have some limitations. This doesn’t mean that they are going to close/shut. THERE WILL BE NO MATERIAL IMPACT ON PERFORMANCE OF BANKS.
What does the RBI monitor?
The RBI checks or monitors closely the following key areas, in order to confirm that the banks are financially healthy, through the annual audits and inspections of banks by RBI:
Capital
Asset quality
Profitability
(TIPS: In short you can remember the key areas as: CAP)
Triggered Points or Indicators that are tracked:
From the start, we have been telling you that there are some trigger points or indicators on which RBI depends to monitor or decide on the strength and stability of the banks. These indicators are as follows:
CRAR/Common Equity Tier 1 ratio
Net NPA ratio
Return on Assets
#RBI Phase 1 GA 2019
Bank rate
Bank rate is the rate of interest which RBI charges from banks while lending to Banks. When Bank rate is increased, it increases the cost of borrowing by banks from RBI. Thus banks tend to reduce their borrowing from RBI, which lowers the lendable resources of banks and consequent decline in money supply increases the interest rates. The opposite happens when RBI reduce bank rate.
Role of Bank rate has been very limited in affecting the. 1 end able resources with banks.
CASH RESERVE RATIO
CRR refers to the ratio of bank's cash reserve balances with RBI with reference to the bank's net demand and time liabilities to ensure the liquidity and solvency of the scheduled banks.
Extent of CRR
Under RBI Act 1934 (Section 42(1) all scheduled banks are required to keep certain minimum cash reserves with RBI. important features are:
· Wef June 22, 2006 (as per RBI Amendment Act 2006), RBI has been empowered to fix CRR (without any floor or ceiling) at its discretion (instead of earlier 3 to 20% range by notification) of the net demand and time liabilities.
· It is to be maintained at a fortnightly average basis (Saturday to following Friday- 14 days) on reporting Friday (advised by RBI to banks at the commence of the year).
· On a daily basis it should be minimum 70% of the average balance wef Dec 28, 2002.
In order to check inflation, when RBI intends to reduce money supply with the banking system, it increases the CRR. On the other
hand in the recessionary situation, when RBI wants to increase the liquidity, it reduces the CRR.
STATUTORY LIQUIDITY RATIO
Section 24 (2A) of Banking Regulation Act 1949 requires every banking company to maintain in India equivalent to an amount
which shall not at the close the business on any day be less than as prescribed by RBI (earlier 25%) as a percentage of the total of
its net demand and time liabilities (to be computed as in case of CRR) in India, which is known as SLR.
RBI powers - RBI can change SLR with the minimum at its discretion and maximum 40%).
SLR is to be maintained as at the close of business on every day i.e. on daily basis based on the
NDTLs as obtaining on the last Friday of the 2nd preceding Fortnight.
Components of SLR
RIM issued the notification dated Sept oS, 2009 giving the list of assets to be maintained by the banks for Sec 24 of Banking
Regulation Act, 1949, as under:
(a) Cash, or (b) Gold valued at a price not exceeding the current market price, or (c) Unencumbered investment in the following
instruments which will be referred to as "Statutory Liquidity Ratio (SLR) securities":
Objective of maintaining SLR :
33 | P a g e1. It helps RBI to control the growth of bank credit. By changing SLR, RIM can impact the availability of funds with the banks for
lending purpose.
2. Maintenance of SLR enhances the solvency position of the banks
3. RBI can compel banks to meet the govt. borrowing program by subscribing to Govt. securities.
OPEN MARKET OPERATIONS
It refers to buying and selling of govt. securities by RBI in the open market. By its impact on the reserves of banks, OMO help
control the money supply in the economy.
When RBI sells Govt. securities to banks, the lendable resources of the latter are reduced and banks are forced to reduce or contain
their lending, thus curbing the money supply. When money supply is reduced, the consequent increase in the interest rates tends
to limit spending and investment.
Repo and Reverse Repo
Under a Repo transaction RBI purchases govt. securities from banks and thus inducts liquidity in the banking system. Repo
transactions are undertaken at Repo rate, which keeps on changing from time to time. By increasing repo rate, RBI increases the
cost of borrowing by banks.
Under a Reverse Repo transaction, RBI sells govt. securities to banks and thus absorbs, liquidity in the banking system.
Sterilization Operation (Market Stabilization Scheme)
Under this mechanism, RBI uses MSS Bonds, with a view to absorb liquidity created by inflow of foreign exchange in to India. The
MSS instruments are in the form of treasury bills or dated securities which RBI issues through auction.
This is also knows as Sterilization operation.
FISCAL POLICY
The fiscal policy is the policy relating to government expenditure and revenue collection, to influence the economic activity. The two
main instruments of fiscal policy are government expenditure and taxation.
The change in the level and composition of taxation and government spending can impact the following variables :
1. Aggregate demand and the level of economic activity;
2. The pattern of resource allocation;
3. The distribution of income.
Stance of fiscal policy
The 3 possible stances of fiscal policy are neutral, expansionary and contractionary.
(a) A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully
funded by-tax revenue and overall, the budget outcome has a neutral effect on the level of economic activity.
(b) An expansionary stance of fiscal policy involves government spending exceeding tax revenue.
(c) A contractionary fiscal policy occurs when government spending' is lower than tax revenue.
Deficits
If the govt. spending is higher than the govt. revenue, there will be deficit, which can be a revene deficit, fiscal deficit or primary
deficit
(a) Revenue deficit = Revenue expenditure - revenue receipts.
(b) Fiscal deficit = Total expenditure - (revenue receipts + capital receipts other than borrowing).
(c) Primary deficit = Fiscal deficit - interest payments.
There are various methods of funding of these deficits. Fiscal deficit is generally financed by borrowing by the govt. by sale of treasury ,bilis or by
raising long term loans etc. This borrowing entails interest cost and in case it increase beyond the reasonable level, it can create default problem
and resultant effects as happened In certain European countries during 2010.
Methods of funding
Govt spends money on a wide variety of things, from general administration to the military and police to services like education and healthcare,
as well as transfer payments such as welfare benefits. This expenditure can be funded by way of Taxation, Seigniorage (by printing money),
Borrowing money from the population or from abroad, Consumption of fiscal reserves, Sale of fixed assets (e.g., land) i.e. disinvestment. All of
these except taxation are forms of deficit financing.
Economic effect of fiscal policy
Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives
of price stability, full employment, and economic growth. Increasing the govt spending and decreasing tax rates are the methods to
stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool for building the
framework for strong economic growth and working towards full employment.
Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives
of price stability, full employment, and economic growth. Increasing the govt spending and decreasing tax rates are the methods to
stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool for building the
framework for strong economic growth and working towards full employment.
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#RBI GA
VERY IMPORTANT FINANCE TOPIC FOR RBI GR B 2019 EXAM
Corporate Governance as Risk Mitigation:
Corporate governance is of vital importance to a company and is almost as important as its primary business plan. When executed successfully, it can prevent corporate scandals, fraud and the civil and criminal liability of the company. It also improves a company’s status in the public opinion as a self-policing company that is responsible and worthy of shareholder and debt holder capital. It commands the shared philosophy, practices and culture of an organization and its employees. Firm without a system of corporate governance is often regarded as a body without a soul or conscience. Corporate governance enables a company honest and free from trouble. If this shared attitude breaks down, then corners will be cut, products will be defective and management will grow complacent and corrupt. The end result is a fall that will occur when gravity in the form of audited financial reports, criminal investigations and federal probes finally catches up, destroying the company instantaneously. Deceitful and unethical dealings can cause shareholders to escape out of fear, distrust and disgust.
Plethora of research has revealed that good corporate governance can result in improved share price performance. It is well established in management reports that there is a great potential for good performance by companies, which have got good corporate governance mechanism and the greatest benefit is in developing companies. Studies have showed that investors are enthusiastic to invest in a better-governed company. Corporate Governance can be strong mechanism for development especially in country like India.
The following issues are important for good Corporate Governance.
1.The rights and obligation of shareholders.
2.Impartial treatment of all stakeholders.
3.The role of all stakeholders clearly defined and the linkage for corporate governance established.
4.Transparency, disclosure of information and audit.
5.The role of board of directors clearly defined.
6.The role of non-executive members of the board clearly defined.
7.Executive management and compensation and performance clearly defined.
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Purchasing Power Parity (PPP)
It states that the exchange rate of a currency with another (currency) is in equilibrium when their domestic purchasing power are equivalent at that exchange rate.
It means that a good should cost same in India and USA after considering the exchange rate of Indian Rupee (INR) and US Dollar (USD).
Suppose, the current exchange rate of Indian rupee to US Dollar is Rs. 60 perUSD (i.e., 1 USD = Rs. 60). Now suppose a laptop costs Rs. 60,000 in India.
According to the PPP theory, the laptop should cost USD (60,000 / 60) = USD 1,000 (considering the current exchange rate of these two currencies) to maintain parity in purchasing power of these two currencies.
But, it may happen that the actual market price of the laptop in USA is USD 800 (say) (equivalent to Rs. 48,000 in India). Therefore, there is an advantage of buying the laptop in USA at much less price than India (Rs. 12,000 less) (it means that the purchasing power is not in parity between these two currencies)
Indian consumers will go to the exchange office and sell their INR and buy USD, and then buy the laptop from USA. It will cause the Indian currency less valuablethan the US dollar.
The demand of laptop sold in India will decrease (since high price), and the priceof laptop will go down. In contrast, the demand of laptop in USA will increase, and the price will rise accordingly.
These factors will cause the exchange rate (of the currencies) and the prices (of laptops) to change such that there is purchasing power parity in both the currencies.
PPP theory tells us that the price differences between countries are not sustainable in the long run, as market forces will equalize prices between the countries and change the exchange rates accordingly.
(Relate the above example with companies that can buy goods in much less price from foreign countries and sell in much less price in India than its counterparts. For this reason, there are several laws or restrictions on imports and a provision of levying customs duty, etc.)
#RBI Grade B 2019
::Sustainable Development Goals (SDG) ::
There are 17 goals which are built on the success of Millennium Development Goals. These goals are interconnected and achievement of one goal contributes to achievement of other goals. These 17 goals are:
1)No poverty
836 million people still live in extreme poverty.
About one in five persons in developing regions lives on less than US$1.25 per day.
Most of the concentration of these poor people lies in Southern Asia and sub-Saharan Africa.
The aim of the goal is to end poverty, promote prosperity and people’s well-being while protecting the environment
2)Zero hunger
Globally, one in nine people in the world today (795 million) are undernourished.
The SDGs aim to end all forms of hunger and malnutrition by 2030, making sure all people – especially children – have access to sufficient and nutritious food all year round.
3)Good health and well-being
More than six million children die before their fifth birthday each year.
Four out of every five deaths of children under age five occur in sub-Saharan Africa and Southern Asia.
The aim is to achieve universal health coverage, and provide access to safe and affordable medicines and vaccines for all.
4)Quality education
More than half of children that have not enrolled in school live in sub-Saharan Africa.
An estimated 50 per cent of out-of-school children of primary school age live in conflict-affected areas.
103 million youth worldwide lack basic literacy skills, and more than 60 per cent of them are women.
This goal ensures that all girls and boys complete free primary and secondary schooling by 2030. It also aims to provide equal access to affordable vocational training, to eliminate gender and wealth disparities, and achieve universal access to a quality higher education
5)Gender equality
In sub-Saharan Africa, Oceania and Western Asia, girls still face barriers to entering both primary and secondary school.
The SDGs aim to ensure that there is an end to discrimination against women and girls everywhere.
Affording women equal rights to economic resources such as land and property are vital targets to realizing this goal. So is ensuring universal access to sexual and reproductive health
6)Clean water and sanitation
Around 663 million people are not having access to improved drinking water sources.
At least 1.8 billion people globally use a source of drinking water that is fecally contaminated.
By 2050, it is projected that at least one in four people will be affected by recurring water shortages.
The goals aims to ensure universal access to safe and affordable drinking water for all by 2030
7)Affordable and clean energy
It aims to ensure universal access to affordable electricity by 2030 by investing in clean energy sources such as solar, wind and thermal.
8)Decent work and economic growth
According to the International Labour Organization, more than 204 million people were unemployed in 2015.
470 million jobs are needed globally for new entrants to the labour market between 2016 and 2030.
The SDGs promote sustained economic growth, higher levels of productivity and technological innovation. Encouraging entrepreneurship and job creation are key to this, as are effective measures to eradicate forced labour, slavery and human trafficking.
With these targets in mind, the goal is to achieve full and productive employment, and decent work, for all women and men by 2030
9)Industry, innovation and infrastructure
Investment in infrastructure and innovation are crucial drivers of economic growth and development.
With over half the world population now living in cities, mass transport and renewable energy are becoming ever more important, as are the growth of new industries and information and communication technologies.
More than 4 billion people still do not have access to the Internet, and 90 percent are from the developing world. Bridging this digital divide is crucial to ensure equal access to information and knowledge, as well as foster innovation and entrepreneurship
10)Reduced inequalities:
Income inequality is a global problem that requires global solutions.
The richest 10 percent earning up to 40 percent of total global income.
The poorest 10 percent earn only between 2 percent and 7 percent of total global income.
In developing countries, inequality has increased by 11 percent if we take into account the growth of population
The Gini Coefficient of income inequality for India has risen from 33.4% in 2004 to 33.6% in 2011.
11)Sustainable cities and communities
More than half of the world’s population now live in urban areas. By 2050, that figure will have risen to 6.5 billion people – two-thirds of all humanity.
Sustainable development cannot be achieved without significantly transforming the way we build and manage our urban spaces.
In 1990, there were ten mega-cities with 10 million inhabitants or more. In 2014, there are 28 mega-cities, home to a total 453 million people.
Making cities safe and sustainable means ensuring access to safe and affordable housing, and upgrading slum settlements.
12)Responsible consumption and production
Achieving economic growth and sustainable development requires that we urgently reduce our ecological footprint by changing the way we produce and consume goods and resources
Agriculture is the biggest user of water worldwide, and irrigation now claims close to 70 percent of all freshwater for human use.
The efficient management of our shared natural resources, and the way we dispose of toxic waste and pollutants, are important targets to achieve this goal.
Encouraging industries, businesses and consumers to recycle and reduce waste is equally important, as is supporting developing countries to move towards more sustainable patterns of consumption by 2030.
13)Climate action
Greenhouse gas emissions continue to rise, and are now more than 50 percent higher than their 1990 level.
The annual average losses from earthquakes, tsunamis, tropical cyclones and flooding amount to hundreds of billions of dollars, requiring an investment of US$6 billion annually in disaster risk management alone
The goal aims to mobilize $100 billion annually by 2020 to address the needs of developing countries and help mitigate climate-related disasters.
14)Life below water
Over three billion people depend on marine and coastal biodiversity for their livelihoods.
30 percent of the world’s fish stocks overexploited, reaching below the level at which they can produce sustainable yields
Oceans also absorb about 30 percent of the carbon dioxide produced by humans, and we are seeing a 26 percent rise in ocean acidification since the beginning of the industrial revolution
The SDGs aim to sustainably manage and protect marine and coastal ecosystems from pollution, as well as address the impacts of ocean acidification
By 2020, conserve at least 10 per cent of coastal and marine areas, consistent with national and international law and based on the best available scientific information
15)Life on land
Plant life provides 80 percent of our human diet, and we rely on agriculture as an important economic resource and means of development
Forests account for 30 percent of the Earth’s surface, providing vital habitats for millions of species and important sources for clean air and water; as well as being crucial for combating climate change
Unprecedented land degradation, and the loss of arable land at 30 to 35 times the historical rate.
Drought and desertification is also on the rise each year, amounting to the loss of 12 million hectares and affects poor communities globally.
Of the 8,300 animal breeds known, 8 percent are extinct and 22 percent are at risk of extinction.
The SDGs aim to conserve and restore the use of terrestrial ecosystems such as forests, wetlands, drylands and mountains by 2020
16)Peace, justice and strong institutions
Without peace, stability, human rights and effective governance, based on the rule of law – we cannot hope for sustainable development
The SDGs aim to significantly reduce all forms of violence, and work with governments and communities to find lasting solutions to conflict and insecurity
By 2030, provide legal identity for all, including birth registration
Corruption, bribery, theft and tax evasion cost some US $1.26 trillion for developing countries per year; this amount of money could be used to lift those who are living on less than $1.25 a day above $1.25 for at least six years
17)Partnership for the goals
The SDGs can only be realized with a strong commitment to global partnership and cooperation
The goals aim to enhance North-South and South-South cooperation by supporting national plans to achieve all the targets
Promoting international trade, and helping developing countries increase their exports, is all part of achieving a universal rules-based and equitable trading system that is fair and open, and benefits all.
BIMSTEC
BIMSTECA regional economic cooperation of nations lying to adjacent areas of Bay of Bengal is known as Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). It came into existence on 6th June, 1997 after Bangkok Declaration. It represents 1.5 billion population (22% of global population). It constitutes GDP of 2.7 trillion economies.
Brief History
It was started as (BIST-EC) Bangladesh, India, Sri Lanka and Thailand economic cooperation in 1997. With inclusion of Myanmar, the group was renamed to ‘BIMST-EC’ (Bangladesh, India, Myanmar, Sri Lanka and Thailand Economic Cooperation). The Nepal and Bhutan has joined in 2004, then the name of the grouping was changed to ‘Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation’ (BIMSTEC)
Members of BIMSTEC
There are seven member states of BIMSTEC, out of which five are South Asian countries and two are South East Asian countries. These seven countries are:
South Asian Countries
Bangladesh
Bhutan
India
Nepal
Sri Lanka
South East Asian Countries
Myanmar
Thailand
Objective of BIMSTEC
The objective of BIMSTEC is to harness shared and accelerated growth through mutual cooperation. It started with co-operation in six sectors -including trade, technology, energy, transport, tourism and fisheries. Later it was expanded to take up specific cooperation projects in the sectors of trade, investment and industry, technology, human recourse development, tourism, agriculture, energy, and infrastructure and transportation ; through joint endeavours and active collaboration, provide mutual assistance in the form of training and research facilities, on matters of common interest in the economic, social, technical and scientific fields
Secretariat of BIMSTEC
The permanent secretariat is situated at Dhaka, Bangladesh. It was established in September, 2014. The present chair is Sri Lanka.
BIMSTEC Summit
BIMSTEC Summit is the highest policy body making in the process. The Summit is held once every two years. The 4th summit was held in Kathmandu, Nepal in August, 2018.
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Strategic Debt Restructuring Scheme
Strategic Debt Restructuring was introduced by RBI in June, 2015 to enable banks recover their bad loan by taking the management control of the distressed companies. The scheme has been introduced to revive the distressed companies which fail to achieve the milestones under Corporate Debt Restructuring by changing the management of the company.JLF/Corporate Debt Restructuring Cell (CDR) may consider the following options when a loan is restructured:
Possibility of transferring equity of the company by promoters to the lenders to compensate for their sacrifices
Promoters infusing more equity into their companies
Transfer of the promoters’ holdings to a security trustee or an escrow arrangement till turnaround of company. This will enable a change in management control, should lenders favour it.
Other Provisions of Scheme
The scheme is not applicable only to single lender.
Such a mandate will result in the lenders acquiring a majority (51%) ownership.
If the company fails to achieve the milestones stipulated in the restructuring package, the decision of invoking the SDR must be taken by the JLF within thirty (30) days of the review of the account during the restructuring
The JLF must approve the debt to equity conversion under the Scheme within ninety (90) days of deciding to invoke the SDR
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