Economy Flashcards
Manufacturing sector challenges
- Infra constraints
- Non-conducive regulatory envt
- High cost of industrial credit
- poor qlty workforce
- Rigid labour laws-compliance burden
- Low R&D expenditure
- Delays, constraints in land acquisition
- Inability to attract large scale FDI
Manufacturing India v/s China stats
- China 2nd largest exporter after EU of mfgd goods 2018 - 18% world share
- India not part of top 10 exporters of mfg goods in 2018
- Targeted mfg GDP share -25% 2022/ 15% in 2018, only half of China
- China industry value added grew avg annual rate of 11% - opening up economy 1978/ India only 7% /12% target
Non-Banking Financial Company (NBFC)
registered under Companies Act, 1956 engaged in business of loans, advances, acquisition of shares/stocks/bonds/debentures/securities
issued by Govt or local authority or other similar marketable securities, leasing, hire-purchase, insurance business, chit business.
• not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
• Systemically important NBFCs: NBFCs whose asset size is of ₹ 500 cr or more. Eg Power Finance Corporation Limited (PFCL), Rural Electrification Corporation Limited (RECL), IL&FS, etc.
• Difference between banks & NBFCs:
o NBFCs cannot accept demand deposits (but some can accept Time deposit; called Deposit taking NBFC).
o Unlike banks, CRR does not apply on any NBFCs while a lower SLR of 15% applies only to Deposit taking NBFC.
o NBFC do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
o NBFCs get license under Companies Act, 1956 and Banks under Banking regulation Act.
o Deposit insurance facility is not available to depositors of NBFCs
What is the difference between payments banks and commercial banks?
both work as per the Banking Regulation Act, 1949. PBs accept deposits upto max Rs. 1 lakh/customer, no such limit for comm banks.
Payments banks Will also be Governed by the provisions of the deficit and credit guarantee Corporation act, 1961, RBI Act, 1934, payment and settlement systems act, 2007 and foreign exchange management act 1999.
objectives of setting up payment banks: financial inclusion by providing payments for services to migrant labour force, opening up small savings accounts of small business holders, schools, workers of unorganised sector.
Payment banks are allowed to issue ATMs, credit card.
Payment banks can’t give Loan services to the people.
The initial min paid-up voting equity for a comm bank shall be 500 crore rupees while the min paid-up equity capital for payments banks shall be rupees 100 crore.
Payment banks cannot accept Deposits from NRI persons.
Payment banks must use the word “payment banks” in their name But commercial banks need not do so.
Payment banks should invest at least 75% of the total demand in government securities SLR with a maturity period of at least one year, while commercial banks have to invest maximum 22% of demand deposits in such securities.
KV Kamath committee
Recommendations to bailout sectors affected by COVID-19 pandemic.
RBI set up the committee to restructure loans- to recommend parametres for one-time restructuring of corporate loans.
Recommendations made by the committee:
1. Graded approach to restructuring of stressed accounts based on severity of the impact – banks can classify the accounts into mild, moderate and severe as recommended by the committee
2. Five financial para metres to gauge sectors facing difficulties – total outside liabilities to adjusted tangible net worth, total debt to earnings before interest, taxes and amortisation, debt service coverage ratio, current ratio and average debt service coverage ratio.
3. 26 sectors have been identified including auto, aviation, construction, hospitality, power, real estate and tourism.
Tier 1, 2 capital
Tier 1 capital is what was paid in (or contributed by shareholders) at the start to form a bank. This could also include any reserves or funds. Also called seed capital.
Tier 1 capitalis subdivided intoCommon Equity (CET) and Additional Capital (AT1). AT1 bondsare a type ofunsecured, perpetual bondsthat banks issue to shore up their core capital base to meet the Basel-III norms. By nature, CET is the equity capital of the bank, where returns are linked to the banks’ performance and therefore the performance of the share price.
However, AT1 bonds are in the nature of debt instruments, which carry a fixed coupon payable annually from past or present profits of the bank.
Tier 2- capital that is infused into the bank at a later stage, say for example when the bank subscribes for an IPO then the proceeds from this would be considered Tier 2. This could also include any issue of shares, debentures or bonds. is long-term borrowing. Also these borrowers will get their money after depositors and other borrowers are repaid in case of a winding up situation
Additional Capital (AT1)
a type ofunsecured, perpetual bondsthat banks issue to shore up their core capital base to meet the Basel-III norms.
1. These havehigher rates than tier II bonds. 2. These bonds have no maturity date. 3. The issuing bank hasthe option to call backthe bonds or repay the principal after a specified period of time. 4. The attraction for investors ishigher yieldthan secured bonds issued by the same entity. 5. Individual investors too can hold these bonds,but mostly high net worth individuals (HNIs) opt for such higher risk, higher yield investments. Given the higher risk,the rating for these bonds is one to four notches lower than the secured bond seriesof the same bank.
2-Fold risk involved
Point of Non-Viability Trigger (PONV)
In a situation where a bank faces severe losses leading to erosion of regulatory capital, the RBI can decide if the bank has reached a situation wherein it is no longer viable. The RBI can then activate a Point of Non-Viability Trigger (PONV) and assume executive powers of the bank.
Basel norms
refer onenote
8 Core Industries of India:
▪️CCC FRENS
(Coal, Crude, Cement, Fertilizers, Refinery, Electricity, Natural gas, Steel)
Risk weightage
Refers to the capital banks aside provisioning to cover loan defaults
What are Open Market Operations (OMOs)?
market operations conducted by the RBI by way of sale/ purchase of G-Secs to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.
Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.
Monetary and Fiscal Policy
Monetary policy refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy. By contrast, fiscal policy refers to the government’s decisions about taxation and spending. Both monetary and fiscal policies are used to regulate economic activity over time.
