classification of government accounting in india for a specific treatment of government accounts in...

8/10/2019 Classification of Government Accounting in India for a Specific Treatment of Government Accounts in India

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Classification of Government Accounting in India For a specific treatment ofgovernment accounts in India. The constitution of India has clearly provided forthree funds or accounts:(l) The Consolidated Fund of India [Article 266(1)]

(2) The Public Account [Article 266(2)](3) The Contingency Fund of India [Article 267(1)] These funds and accounts exist separately for the Government of India, for

each State and for each Union Territory having a Legislative Assembly. There is noseparate Public Account in the case of Union Territory Governments , thetransactions pertaining to this account shall be booked in the Public account of theCentral Government.

The Accounts of Union Territories of Delhi, Andaman and Nicobar Island,

Dadra and Nagar Haveli, Lakshadweep, Chandigarh and Daman and Diu which do nothave Legislative Assemblies , form part of the Accounts of the Government of India.

Compare/Differences between Consolidated Fund and Contingency Fund ofIndia and Public Accounts can be easily understood after reading the entire article.

CONSOLIDATED FUND OF INDIA
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There is both for the centre and each of the states, a consolidated fund towhich all incomes received by the government are credited. These income compriseall revenues. (i) tax or non-tax; (ii) all short-term loans like the Treasury Bills andways and means, and (3) moneys received by the government in repayment of loans

it had advanced previously.

Certain expenditures like the salaries and allowances of the President, theChief Election Commissioner, the Comptroller and Auditor General of India. theSupreme Court charged upon it. i.e..they have to paid out of regardless of legislativesanction. They are described as non-rateable items of expenditure.

All government expenditure is made from this fund, except for exceptionalitems met from the Contingency Fund or the Public Account.

No money can be withdrawn from this fund without the Parliament'sapproval. The time of withdrawal is at the time of Budget. Budget is a procedure towithdraw the generated money for useful purposes.

Non-votable Expenditure part of Consolidated Fund of India is not subjectedor reduced under CUT Motions.As per the provisions of Article 112, the following expenditure shall be expenditurecharged on the Consolidated Fund of India (i) the emoluments and allowances of the President and other expenditure relatingto his office;(ii) the salaries and allowances of the Chairman and the Dy. Chairman of the Councilof States and the Speaker and Dy Speaker of the House of the People;(iii) debt charges for which Government of India is liable including interests, sinkingfund charges and redemption charges, and other expenditure relating to the raisingof loans and the service and redemption of debt;(iv) the salaries and pensions pay able in respect to judges of the Supreme Court andHigh Courts;(v) the salary and pension payable to the Comptroller and Auditor General of India;

(vi) any sums required to satisfy any judgment, decree or award of any court orarbitral tribunal; and(vii) any other expenditure declared by this Constitution or by Parliament by law socharged.


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Demand For Grants : Lok Sabha takes up for discussion each ministry'sexpenditure proposals, and this is known as demand for grants, a process that takesseveral weeks and spills over to the next financial year.

The Appropriation Bill is intended to give authority to Government to incurexpenditure from and out of the Consolidated Fund of India. The procedure forpassing this Bill is the same as in the case of other money Bills. This bill is introducedonly after the general discussion on Budget proposals and the completion of votingon grants.

Vote On Account : The demand for grants takes time, and the governmentcannot wait for Parliament to clear the expenditure proposals of ministries beforemeeting its expenses from April 1. The constitution, therefore, empowers Lok Sabhato grant a vote-on-account (Article 116) so that the government can continue withthe necessary expenditure into the new fiscal, before the Budget proposals actuallyget passed after necessary discussions. The vote-on-account normally covers theexpenditure requirement of the government for two months .

CONTINGENCY FUND OF INDIA(Article- 267(1) It is in the nature of an imprest i.e. money maintained for a specific purpose.

It's at disposal of President of India to make advances to meet urgentunforeseen expenditure (Like Disasters, natural calamities and business

interruption) which is subjected to pending authorization by the Parliament. If the Parliament when comes in to session and approves such expenditure,

then it will transfer such equivalent amount from the Consolidated Fund toContingency Fund so that the total corpus of the fund Rs.500 Crores remains same.But in times of emergency, this could pose a problem, especially if Parliament is notin session. Even if it is meeting, it takes time to prepare the relevant bill and obtainits clearance.

The funds are added to this account with prior approval from Parliament.

The Corpus of the Fund was raised in 2005 the limit was raised from 50 croresto 500 crores.

The fund is held by the finance secretary on behalf of the President of Indiaand it can be operated by executive action.


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Contingency Fund of each State Government is established under Article 267(2) ofthe Constitution this is in the nature of an imprest placed at the disposal of theGovernor to enable him/her to make advances to meet urgent unforeseenexpenditure, pending authorization by the State Legislature. Approval of the

Legislature for such expenditure and for withdrawal of an equivalent amount fromthe Consolidated Fund is subsequently obtained, whereupon the advances from theContingency Fund are recouped to the Fund. The corpus varies across states and thequantum is decided by the State legislatures.

PUBLIC ACCOUNT OF INDIA ARTICLE -266(2)

Public Account mentioned under Article 266 (2) of the Constitution andreceives money from accounts mentioned other than in Consolidated Fund of India.

Parliamentary authorization for payments from the Public Account istherefore not required.

Receipts under this account mainly flow from the sale of Savings Certificates,contributions into General Provident Fund and Public Provident Fund, SecurityDeposits and Earnest Money Deposits received by the Government. In respect ofsuch receipts, the Government is acting as a Banker or Trustee and refunds themoney after completion of the contract/event.

Public Account is divided into six sub-division

Small Savings, Provident Funds etc. Reserve Funds. Deposits and Advances. Suspense and Miscellaneous. Remittances. Cash Balance.

Temperature Zones of the Earth: The distribution of temperature is not uniform onthe surface of the Earth.

Pattern: Different temperature zones are found on the earth.

It goes on decreasing as we move from the Equator to the Poles.

Type of temperature Zones:


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Torrid Zone : The zone which lies between the Tropic of Cancer (or 23 30' North latitude) and the Tropic

of Capricorn (or 23 30' South latitude) with the Equator in between, is known as the Tropical or Torrid

Zone. In this zone the Sun's rays arc vertically overhead during a greater part of the year.

It receives the maximum insolation.

Frigid Zones or Polar Zones : The zones which lie between the Arctic Circle (6630" North latitude) andNorth Pole (90 North latitude) and the Antarctic Circle (66 30'South latitude) and the South Pole are

called the Frigid Zones or Polar Zones. They receive the minimum insolation, so they are very cold.

Temperate Zones: The zones which lie in between the Tropical Zone and Polar zones have moderate

temperature so they are called the Temperate Zones.

Name the sectors where FDI is NOT allowed in India, both under the

Automatic Route as well as under the Government Route?

FDI is prohibited under the Government Route as well as the Automatic Route in the

following sectors:

i) Atomic Energy
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ii) Lottery Business

iii) Gambling and Betting

iv) Business of Chit Fund

v) Nidhi Company vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal

Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled

conditions and services related to agro and allied sectors) and Plantations activities

(other than Tea Plantations)

vii) Housing and Real Estate business (except development of townships, construction

of residential/commercial premises, roads or bridges to the extent specified in

notification viii) Trading in Transferable Development Rights (TDRs).

ix) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco

substitutes.

For Knowledge Level III :

Name the authorities Dealing With Foreign Investment:

(a) Foreign Investment Promotion Board (popularly known as FIPB) : The Board is responsible for

expeditious clearance of FDI proposals and review of the implementation of cleared proposals.

It also undertake investment promotion activities and issue and review general and sectoral

policy guidelines; (b) Secretariat for Industrial Assistance (SIA) : It acts as a gateway to industrial investment in India

and assists the entrepreneurs and investors in setting up projects. SIA also liaison with other

government bodies to ensure necessary clearances;


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(c) Foreign Investment Implementation Authority (FIIA) : The authority works for quick

implementation of FDI approvals and resolution of operational difficultieis faced by foreign

investors;

(d) Investment Commission (e) Project Approval Board

(f) Reserve Bank of India

What are the instruments for receiving Foreign Direct Investment in an Indian company?

Foreign investment is reckoned as FDI only if the investment is made in equity shares , fully andmandatorily convertible preference shares and fully and mandatorily convertible debentures withthe pricing being decided upfront as a figure or based on the formula that is decided upfront. Any

foreign investment into an instrument issued by an Indian company which: gives an option to theinvestor to convert or not to convert it into equity or does not involve upfront pricing of theinstruments a date would be reckoned as ECB and would have to comply with the ECBguidelines.

The FDI policy provides that the price/ conversion formula of convertible capital instruments

should be determined upfront at the time of issue of the instruments. The price at the time of

conversion should not in any case be lower than the fair value worked out, at the time of issuance

of such instruments, in accordance with the extant FEMA regulations [the DCF method of

valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the

listed companies].

What are the Total Inflows of FDI in India :

a. For the FY 2012-13 (for the month of July, 2012) was US$ 1.47 billion.

b. Amount of FDI equity inflows for the financial year 2012-13 (from April

2012 to July 2012) stood at US$ 5.90 billion.

c. Cumulative amount of FDI (from April 2000 to July 2012) into

India stood at US$ 176.76 billion

.


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FDI Equity Inflows from 2000-2012

S. No Financial Year

(April March) Amount of FDI Inflows

%agegrowth over

previousyear (in

terms of US$)

In Rs,crores

In US$million

1 2000-01 10733 2463 -

2 2001-02 18654 4065 ( + ) 65%

3 2002-03 12871 2705 ( - ) 33 %4 2003-04 10064 2188 ( - ) 19 %

5 2004-05 14653 3219 ( + ) 47%

6 2005-06 24584 5540 ( + ) 72%

7 2006-07 56390 12492 (+ )125%

8 2007-08 98642 24575 ( + ) 97%

9 2008- 09 * 142829 31396 ( + ) 28%

10 2009-10 # 123120 25834 ( - ) 18 %

11 2010-11 # 88520 19427 ( - ) 25 %

12 2011-12 # (April - January 2012) 122307 26192 -

CUMULATIVE TOTAL (from April 2000 toJanuary 2012) 723367 160096 -

(a) including amount remitted through RBI

s-NRI Schemes (2000-2002).

(ii) FEDAI (Foreign Exchange Dealers Association of India) conversion rate from rupees to US dollar


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applied, on the basis of monthly average rate provided by RBI (DEAP), Mumbai.

(iii) Variation in equity inflows reported in above Table II-A & II-B for 2006-07, 2007-08, 2008-09, 2009-10

& 2010-11 is due to difference in reporting of inflows by RBI in their monthly report to DIPP & monthly RBI

bulletin.

(IV) # Figures for the years 2009-10, 2010-11 & 2011-12 are provisional subject to reconciliation with RBI.

(V) *

An additional amount of US$ 4,035 million pertaining to the year 2008-09, since reported by RBI, has

been included in FDI data base from February 2012.

Which country tops in inflow of FDI Since 2000-2010? Top 5 Countries for FDI :

Country Iinflow in %age terms

Inflows in absolute Terms

(million US dollars) Mauritius 42% 50164

Singapore 9 11275

USA 7 8914

UK 5 6158

Netherlands 4 4968

Majority of the foreign direct investment comes through Mauritius as it enjoys several tax

advantages, which works well for the international investors.

What are the Limits for FDI in different Sectors :

** Note / Caution : The below is only broad categorization and may need fine tuning andupdations, For example in Civil Aviation and Broadcasting there are subcategories withdifferent %ag of FDI allowed. These needs to be checked for further and updated knowledge.

(a) News About Civil Aviation and Broadcasting can be read from this link.

(b) Second Link for the details can be checked by clicking here

(A) 26% FDI is permitted in
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Defence (In July 2013, there has been no change in FDI limit but higherinvestment may be considered in state of the art technology production

by CCS)

Newspaper and media **

Pension sector (allowed in October 2012 as per cabinet decision)

Courier Services (through automatic route)

Tea Plantation (upto 49% through automatic route; 49-100% throughFIPB route)

(B)49% FDI is permitted in : BankingCable network**DTH **Infrastructure investmentTelecom

Insurance (in July 2013 it was raised to 49% from 26% subject to Parliamentapproval)

Petroleum Refining (49% allowed under automatic route) Power Exchanges (49% allowed under automatic route)

Stock Exchanges, Depositories allowed under automatic route upto 49%

49% (FDI & FII) in power exchanges registered under the Central ElectricityRegulatory Commission (Power Market) Regulations 2010 subject to an FDI limitof 26 per cent and an FII limit of 23 per cent of the paid-up capital is now

permissible. [Permitted in September 2012]

(C ) 51% is Permitted in

Multi-Brand Retail (Since September 2012)

Petro-pipelines


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(D) 74% FDI is permitted in

Atomic minerals

Science Magazines /JournalsPetro marketingCoal and Lignite minesCredit information comanies (raised from 49% to 74% in July, 2013)

(E)100% FDI is permitted in

Single Brand Retail (100% FDI allowed in single brand retail; 49% throughautomatic route; 49-100% through FIPB) AdvertizementAirportsCold-storageBPO/Call centresE-commerceEnergy (except atomic)export trading houseFilmsHotel, tourismMetro trainMines (gold, silver)Petroleum explorationPharmaceuticalsPollution controlPostal service

Roads, highways, ports.TownshipWholesale trading Telecom (raised from 74% to 100% in July, 2013 by GoI)


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Asset Reconstruction Companies (increased from 74% to 100 in July, 2013. Outof this upto 49% will be under automatic route)

Source : RBI website, Newpaper reports, GoI data What is the full form of FDI :

The full form of FDI is Foreign Direct Investment.

What is the meaning of FDI ?

The Foreign Direct Investment means cross border investment made by a resident in one

economy in an enterprise in another economy, with the objective of establishing a lasting

interest in the investee economy.FDI is also described as investment into the business of a country by a company in another

country. Mostly the investment is into production by either buying a company in the target

country or by expanding operations of an existing business in that country. Such investments

can take place for many reasons, including to take advantage of cheaper wages, special

investment privileges (e.g. tax exemptions) offered by the country.

Why Countries Seek FDI ? (a) Domestic capital is inadequate for purpose of economic growth; (b) Foreign capital is usually essential, at least as a temporary measure, during the period when the

capital market is in the process of development; (c) Foreign capital usually brings it with other scarce productive factors like technical know how,

business expertise and knowledge

What are the major benefits of FDI : (a) Improves forex position of the country; (b) Employment generation and increase in production ;

(c)

Help in capital formation by bringing fresh capital; (d) Helps in transfer of new technologies, management skills, intellectual property (e) Increases competition within the local market and this brings higher efficiencies (f) Helps in increasing exports; (g) Increases tax revenues

Why FDI is Opposed by Local People or Disadvantages of FDI :


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(a) Domestic companies fear that they may lose their ownership to overseas company (b) Small enterprises fear that they may not be able to compete with world class large companies

and may ultimately be edged out of business; (c) Large giants of the world try to monopolise and take over the highly profitable sectors; (d) Such foreign companies invest more in machinery and intellectual property than in wages of the

local people; (e) Government has less control over the functioning of such companies as they usually work aswholly owned subsidiary of an overseas company;

Brief Latest Developments on FDI (all sectors including retail):-

2012 October: In the second round of economic reforms, the government cleared amendments to raise theFDI cap

(a) in the insurance sector from 26% to 49%; (b) in the pension sector it approved a 26 percent FDI;

Now, Indian Parliament will have to give its approval for the final shape,"

2012 - September : The government approved the

(a) Allowed 51% foreign investment in multi-brand retail,

(b) Relaxed FDI norms for civil aviation and broadcasting sectors. FDI cap in Broadcasting was raised to 74%from 49%;

(c) Allowed foreign investment in power exchanges

2011 December :

(i) The Indian government removed the 51 percent cap on FDI into single-brand retail outletsand thus opened the market fully to foreign investors by permitting 100 percent foreigninvestment in this area.

For Knowledge Level II Explain the forms in which business can be conducted by a foreign company in India

A foreign company planning to set up business operations in India may: Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly OwnedSubsidiary.

Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of theforeign company


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What is the procedure for receiving Foreign Direct Investment in an Indian company?

An Indian company may receive Foreign Direct Investment under the two routes as given under: i. Automatic Route

FDI is allowed under the automatic route without prior approval either of the Government or theReserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. ii. Government Route FDI in activities not covered under the automatic route requires prior approval of theGovernment which are considered by the Foreign Investment Promotion Board (FIPB),Department of Economic Affairs, Ministry of Finance.

What is Scope of FDI in India? Why World is looking towards India for Foreign Direct Investments :

India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive tothe world for FDI. Even Government of India, has been trying hard to do away with the FDI caps formajority of the sectors, but there are still critical areas like retailing and insurance where there is lot ofopposition from local Indians / Indian companies. Some of the major economic sectors where India can attract investment are as follows:-

Telecommunications

Apparels

Information Technology

Pharma

Auto parts

Jewelry

Chemicals

In last few years, certainly foreign investments have shown upward trends but the strict FDI policies have puthurdles in the growth in this sector. India is however set to become one of the major recipients of FDI in theAsia-Pacific region because of the economic reforms for increasing foreign investment and the deregulation ofthis important sector. India has technical expertise and skilled managers and a growing middle class market ofmore than 300 million and this represents an attractive market.

Background and Recent Developments for FDI in Retail Sector which has raised lot of controversies inpolitical circles :

As part of the economic liberalization process set in place by the Industrial Policy of 1991, theIndian government has opened the retail sector to FDI slowly through a series of steps:


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1995 : World Trade Organisations (WTO) General Agreement on Trade in Services, whichincludes both wholesale and retailing services, came into effect

1997 : FDI in cash and carry (wholesale) with 100% rights allowed under the governmentapproval route;

2006 : FDI in cash and carry (wholesale) was brought under automatic approval route; Upto51% investment in single brand retail outlet permitted, subject to Press Note 3 (2006 series)

2011 : 100% FDI in Single Brand Retail allowed

2012 : On Sept. 13, Government approved the allowance of 51 percent foreign investment inmulti-brand retail, [ It also relaxed FDI norms for civil aviation and broadcasting sectors]

What is full form of GAAR ? or What is GAAR ?

The full form of GAAR is : General Anti-Avoidance Rules

What is GAAR in simple terms ?

Tax Avoidance is an area of concern across the world. The rules are framed

in different countries to minimize such avoidance of tax. Such rules insimple terms are known as " General Anti Avoidance Rules " or GAAR.

Thus GAAR is a set of general rules enacted so as to check the tax avoidance.

Why News for GAAR has been prominent in India in recent times ?

News for GAAR has been in prominence in last few years as IndianGovernment has taken initiative to introduce GAAR or General Anti

Avoidance Rules with a view to increase tax collections.


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can say SAAR being more specific provide certainty to taxpayers where as

GAAR being general in nature can be misused and is subject to arbitrary

interpretation by tax authorities.

GAAR Definition :

GAAR is a concept which generally empowers the Revenue Authorities in a

country to deny the tax benefits of transactions or arrangments which do

not have any commercial substance or consideration other than achieving

the tax benefit. Whenever revenue authorities question such transactions,there is a conflict with the tax payers. Thus, different countries started

making rules so that tax can not be avoided by such transactions. Australia

introduced such rules way back in 1981. Later on countries like Germany,

France, Canada, New Zealand, South Africa etc too opted for GAAR.

However, countries like USA and UK have adopted a cautious approach and

have not been aggressive in this regard.

Thus, in nutshell we can say that GAAR usually consists of a set of broad

rules which are based on general principles to check the potential

avoidance of the tax in general, in a form which can not be predicted and

thus can not be provided at the time when it is legislated.

GAAR in India (Chronology of GAAR controversy in India)

In India, the real discussions on GAAR came to light with the release of draft DirectTaxes Code Bill (popularly known as DTC 2009) on 12th August 2009. It contained the

provisions for GAAR. Later on the revised Discussion Paper was released in June 2010,

followed by tabling in the Parliament on 30th August, 2010, a formal Bill to enact the

law known as the DirectTaxes Code 2010. The same was to be made applicable wef 1st


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April, 2012. However, owing to negative publicity and pressures from various groups,

GAAR was postponed to at least 2013, and was likely to be introduced alongwith the

Direct Tax Code (DTC) from 1st April 2013. Moreover, an Expert Committee has been

set by Prime Minister (Manmohan Singh) in July 2012 to vet and rework the GAARguidelines issued in June 2012. The latest reports (September 2012) indicates, it may

not be implemented even for 3 years i.e. this will be postponed for 3 years (2016-17).

Some of recent developments about GAAR are :-

(a) 16th March, 2012 : Finance Minister, Pranab Mukherjee takes a tough stand and

announces that the government will crack down on tax avoidance effective from fiscal

year 2012-13(b) 7th May, 2012 : Finance Minister, Pranab Mukherjee forced to eat his words and

agreed to defer GAAR by a year as his announcements spooked oversea investors

(c) 28th June, 2012 : Finance Ministry releases first draft on GAAR; There is wide

criticism of the provisions.

(d) 14th July, 2012 : PM, Manmohan Singh, forms review committee under

Parthasarathi Shome, for preparing a second draft by 31st August and final guidelines by

30th September, 2012

(e) 1st September, 2012 : Shome Committee recommends to defer GAAR by three

years. It also recommends some more investor friendly measures

(f) 14th January, 2013 : GoI partially accepts the recommendations of Shome

Committee and has decided to defer the same for 2 years and will now be effective from

the year 2016-17

(g) On 27th September, 2013, GoI issued notification and as per this notification GAAR

would be applicable to only to foreign institutional investors that have not taken the benefit

of an agreement under Section 90 or Section 90A of the I-T Act or Double Taxation

Avoidance Agreement (DTAA). Thus now (a) investments made by foreign investors prior


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to August 2010 will not attract GAAR; ( b) GAAR provisions that will come into effect

from April 2016 and (c) apply only to business arrangements with a tax benefit exceeding

Rs3 crores.

Some other rules notified includes : "Where a part of an arrangement is declared to be an

impermissible avoidance arrangement, the consequences in relation to tax shall be

determined with reference to such part only," Before invoking the GAAR provisions, tax

officials would have to be "issue a notice in writing to the assessee seeking objections, if

any, to its applicability".

However, this notification has been criticised as according to this notification theinvestments made prior to 30th August, 2010 will be certainly out of GAAR scrutiny, but

the rules place other arrangements under the scrutiny of GAAR. Therefore, experts are

not happy that the uncertainty relating to other aspects except investments still continues.

The grandfathering under the notification also appears to be merely a mirage, because

only income from investments sold before August 2010 will be grandfathered. This means

investments made prior to August 2010 but sold after GAAR becomes effective will besubject to GAAR. (For definition of Grandfathering see below)

What was the Basic Criticism of GAAR ? Why GAAR is dreaded ?

Many provisions of GAAR have been criticised by various people. However,

the basic criticism of GAAR provisions is that it is considered to be toosweeping in nature and there was a fear (considering poor record of IT

authorities in India) that Assessing Officers will apply these provisions in a

routine manner (or read misuse) and harass the general honest tax payer

too. There is only a fine distinction between Tax Avoidance and Tax


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manufactured in the tax exempt unit (while doing only processof packaging there). Is GAAR applicable in such a case ?

Interpretation:

There is an arrangement and there is a tax benefit, the mainpurpose or one of the main purposes of this arrangement isto obtain a tax benefit. The transaction lacks commercialsubstance and there is misuse of the tax provisions. Revenuewould invoke GAAR as regards this arrangement.

Background / White Label ATM in Canada and India :

White label ATMs are popular in Canada. Since 2006, some banks have been pressingwith RBI to introduce white label ATMs in India too. On 14th February, 2012, RBI has

issued DRAFT guidelines and asked the comments of the bankers and public in thisregard. Thus, these guidelines are still not applicable but are likely to be soon approved.

Definition and Meaning of White Label ATM - India ? or What is White Label ATM ? orWhat is WLA ?

White Label ATM or White Label Automated Teller Machines or WLAs in India will beowned and operated by Non Bank entities. From such White Label ATM customer fromany bank will be able to withdraw money, but will need to pay a fee for the services.These white label automated teller machines (ATMs) will not display logo of any particularbank and are likely to be located in non traditional places.

What is the purpose for introduction of White Label ATMs in India

In India only Banks are allowed to set up ATMs. Although between 2008 - 2011, there hasbeen 30% growth in number of ATMs and by the beginning of 2012, we have about 87,000ATMs in India, yet the penetration of ATMs in Tier III and Tier IV cities has been low anddowntime of such ATMs has been high. Thus, RBI is feeling that there is a need to expandATM network, which can be done by only with the help of private operators.

Who will benefit from White Label ATMs :

The white label automated teller machines are likely to benefit customers as well as banks.With the expansion of ATM network, customers will be able to withdraw funds at morelocations which will be convenient and located near to their home or place of work. Bankstoo support introduction of white label ATMs as such machines are likely to reduce pre-transaction cost for them and will be free from the problems relating to maintaining andrunning such a payment channel


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What Problems are Likely to be Faced by Bankers and Customers :

Bankers are already sounding caution about the pitfalls of white label ATMs. The first andforemost concern for customers will be the inconvenience they may feel in case of failedtransactions on WLAs. In such cases the dispute resolution mechanism will involve threeentities the WLA operator, the sponsor bank of the operator, and the customer's bank.The WLA operators being non bank entities and running purely on profit basis may takelonger time or avoid payments on account of failed transactions. The second concern forcustomers will be the high cost they are likely to pay for use of such ATMs.

***** Meaning of While Label ATMs ; Who owns White Lable ATMs ?

News For White Label ATMs In last few years in India has we have witnessed a lot of brown label' ATMs, or

outsourcing of ATM services by banks. Thus, it was imperative that RBI will soon allow

white label ATMs in India. However, it was not being permitted as certain regulatoryissues were involved. White Lable ATMs have been in news in February 2012 as RBI

issued the draft guidelines for the same. RBI has issued the following draft guidelines onwhite lableAutomated teller machines:-

DETAILS OF THE DRAFT GUIDELINES ISSUED BY RBI in February 2012 (These draft guidelines are given here for those who wants to know in depth about theWhite Label ATMs and are of some use only till RBI comes out with final guidelines )

General Criteria for non-bank entities authorized by RBI to set up and operate WLAs

The authorized non-bank entity (henceforth referred to as WLA Operator) would have thefreedom to choose the location of the WLA. However, it will adhere to annual targets and theratio of WLA between Tier I &II and Tier III-VI centres that may be stipulated by the ReserveBank of India.

Only the Cards issued by banks would be permitted to be used at the WLAs to start with.

Acceptance of deposits at the WLA site into the account of the WLA operator or in any otheraccount indicated by it shall not be permitted.

The WLA Operator will be the "acquirer" for all transactions at the WLA and earn his feeaccordingly.

The WLA Operator would be permitted to earn extra revenue through advertisement and byoffering value added services. The advertisements placed on such ATMs would be subject toAdvertising Standards Council of India (ASCI) codes and other regulations.

Being non-bank owned ATMs, the guidelines on five free transactions in a month for using other bank ATMs would not be applicable for transactions effected on the WLAs. The charges for thetransactions should be displayed on the screen before the customer initiates the transaction.


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this regard, including making available relevant records and information, to the Issuing Bank.For this purpose, the Sponsor Bank should have necessary arrangement with the WLA Operator.

The extant directives of the RBI on the time-lines for resolution of complaints of failed ATMtransactions would also apply to transactions at the WLAs. For delay in resolution of suchcomplaints attributable to the Sponsor Bank or the WLA Operator resulting in payment of

penalty to the customer by the Issuing Bank in terms of the directives of RBI, the Issuing Bankshall be compensated by the Sponsor Bank. The Sponsor Bank may have appropriateagreements with the WLA Operator for recovery of such amounts .

C. ATM Network Operators Network Operators will offer direct connectivity to the WLA Operator to facilitate transactionsat the WLA and the settlement thereof after seeking requisite approvals from the RBI.

They bring the WLA Operator under the a mbit of the Networks Operating Guidelines and theDispute Resolution Mechanism put in place in accordance with the extant directives of theReserve Bank of India.

D. General The ATM Network Operator, the WLA Operator and the Sponsor Bank shall enter into a Tri-

partite Service Level Agreements (SLA) to address issues relating to inter-bank settlement of thetransactions at the WLAs and settlement of customer complaints relating to failed ATMtransactions. The SLAs should clearly spell out the role of each party.

The relevant provisions of all guidelines/directives/instructions issued by various departments ofthe Reserve Bank of India viz. Department of Payment & Settlement Systems (DPSS),Department of Banking Operations and Development (DBOD) and Customer ServicesDepartment (CSD) with reference to the services, operations, security, etc. at the bank ATMswould also apply to the WLAs.

We all know that each country has its own currency (except in Europe

where a group of countries have a common currency). The rate at which we

can convert one currency into another currency is know as conversion rate

between those twocurrencies. Therefore, if I have Rs1,000/- with me and I

wish to get US $ by surrendering the above INR, I need to go to a bank or an

authorized currency dealers for this transaction. They will convert my

INR into US$ at that day's rate. Thus, it becomes clear that there is aforeign exchange market where you can buy one currency in lieu of another

currency. The rate at which this happens is called conversion rate. This

rate changes on daily basis depending on the demand and supply of each

currency.


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However, most of us, tend to confuse when we read that there is a Rupee Depreciation

as it has moved from Rs50 per US$ to Rs55 per US$. A look at this change indicates

value has increased but report reads that INR has depreciated. Undoubtedly it isconfusing. Let us try to remove this confusion.

What is Rupee Appreciation and Rupee Depreciation ? What is meant by

Rupee Depreciation and Rupee Appreciation ?

Now we will try to understand what is appreciation and depreciation refersto when we read such news on daily basis. Let us assume that in case, you

go to a bank and asks the bank that you intend to buy US$100, please tell me

what is the amount of INR you have to pay. Bank informs you that you

need to pay Rs 5410/-. This means you can buy US$ @ Rs.54.10 per dollar.

This is the selling rate of the said bank for US $ for that day.

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Now after one month, you go to bank and again ask the bank that you wish

to buy US$ 100, and bank tells you that this time you have to pay Rs.5490.

This means you have pay more to receive the same amount of US $. This

means the local currency has depreciated.

This will be known as Depreciation of Indian Rupee. In the above example,

it is clear that value of INR has gone when compared to US$.


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On the other hand, if the rate quoted by bank on second occasion is say Rs.

5380/-. It will be considered as appreciation of INR as this time you have

to pay less amount to buy the same amount of US$.

What is the impact of Depreciation and Appreciation of Rupee on Indian

living in India. We are assuming that initially the exchange rate of US$-INR

is Rs.50/- :

What is Inflation or What is the meaning of Inflation :

In economics inflation means, a rise in general level of prices of goods and services in a

economy over a period of time. When the general price level rises, each unit of currency

buys fewer goods and services. Thus, inflation results in loss of value of money. Another

popular way of looking at inflation is "toomuch money chasing too few goods". The last

definition attributes the cause of inflation to monetary growth relative to the output /

availability ofgoods and services in the economy.

In case the price of say only one commodity rise sharply but prices of other commodities

fall, it will not be termed as inflation. Similarly, in case due to rumors if the price of a

commodity rise during the day itself, it will not be termed as inflation.

What are different types of inflation :

Broadly speaking inflation is divided into two categoires i.e.

(a) DEMAND - PULL INFLATION: In this type of inflation p rices increase results from anexcess of demand over supply for the economy as a whole. Demand inflation occurs whensupply cannot expand any more to meet demand; that is, when critical production factors are

being fully utilized, also called Demand inflation.


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(b) COST - PUSH INFLATION: This type of inflation occurs when general price levels riseowing to rising input costs. In general, there are three factors that could contribute to Cost-Pushinflation: rising wages, increases in corporate taxes, and imported inflation. [imported raw or

partly-finished goods may become expensive due to rise in international costs or as a result ofdepreciation of local currency ]

What is Deflation ? :

Deflation is the opposite of inflation. Deflation refers to situation, where there is decline in

general price levels. Thus, deflation occurs when the inflation rate falls below 0% (or it is

negative inflation rate). Deflation increases the real value of money and allows one to buy more

goods with the same amount of money over time. Deflation can occur owing to reduction in the

supply of money or credit. Deflation can also occur due to direct contractions in spending,

either in the form of a reduction in government spending, personal spending or investment

spending. Deflation has often had the side effect of increasing unemployment in an economy,

since the process often leads to a lower level of demand in the economy.

What is Stagflation :

Stagflation refers to economic condition where economic growth is very slow or stagnant and

prices are rising. The term stagflation was coined by British politician Iain Macleod, who used

the phrase in his speech to parliament in 1965, when he said: We now have the worst of both

worlds - not just inflation on the one side or stagnation on the other. We have a sort of

stagflation situation. The side effects of stagflation are increase in unemployment-

accompanied by a rise in prices, or inflation. Stagflation occurs when the economy isn't growing

but prices are going up. At international level, this happened during mid 1970s, when world oil


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Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel

Committee on Banking Supervision to enhance the banking regulatory framework under

Basel I and Basel II. This latest Accord now seeks to improve the banking sector's abilityto deal with financial and economic stress, improve risk management and strengthen the

banks' transparency.

What are the objectives / aims of the Basel III measures ?

Basel 3 measures aim to:

improve the banking sector's ability to absorb shocks arising from financial and

economic stress, whatever the source

improve risk management and governance

strengthen banks' transparency and disclosures.

Thus we can say that Basel III guidelines are aimed at to improve the ability of banks towithstand periods of economic and financial stress as the new guidelines are more stringent

than the earlier requirements for capital and liquidity in the banking sector.

How Does Basel III Requirements Will Affect Indian Banks :

The Basel III which is to be implemented by banks in India as per the guidelines issued by

RBI from time to time, will be challenging task not only for the banks but also for GOI. It

is estimated that Indian banks will be required to rais Rs 6,00,000 crores in external capital

in next nine years or so i.e. by 2020 (The estimates vary from organisation to

organisation). Expansion of capital to this extent will affect the returns on the equity of

these banks specially public sector banks. However, only consolation for Indian banks is


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the fact that historically they have maintained their core and overall capital well in excess

of the regulatory minimum.

What are Three Pillars of Basel II Norms or What are the changes in Three Pillars of Basel

iii Accord ?

Basel III: Three Pillars Still Standing :

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Any one who has ever heard about Basel I and II, is most likely must have heard about

Three Pillars of Basel. Three Pillar of Basel still stand under Basel 3.

Basel III has essentially been designed to address the weaknesses that become too obvious

during the 2008 financial crisis world faced. The intent of the Basel Committee seems to

prepare the banking industry for any future economic downturns.. The framework

enhances bank-specific measures and includes macro-prudential regulations to help create

a more stable banking sector.

The basic structure of Basel III remains unchanged with three mutually reinforcing pillars.

Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets

(RWAs) : Maintaining capital calculated through credit, market and operational risk

areas.

Pillar 2 : Supervisory Review Process : Regulating tools and frameworks for dealing with

peripheral risks that banks face.

Pillar 3: Market Discipline : Increasing the disclosures that banks must provide to

increase the transparency of banks


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What are the Major Changes Proposed in Basel III over earlier Accords i.e. Basel I and

Basel II?

What are the Major Features of Basel III ?

(a) Better Capital Quality : One of the key elements of Basel 3 is the introduction of much

stricter definition of capital. Better quality capital means the higher loss-absorbing

capacity. This in turn will mean that banks will be stronger, allowing them to better

withstand periods of stress.

(b) Capital Conservation Buffer: Another key feature of Basel iii is that now banks will

be required to hold a capital conservation buffer of 2.5%. The aim of asking to build

conservation buffer is to ensure that banks maintain a cushion of capital that can be used

to absorb losses during periods of financial and economic stress.

(c) Countercyclical Buffer: This is also one of the key elements of Basel III. The

countercyclical buffer has been introducted with the objective to increase capitalrequirements in good times and decrease the same in bad times. The buffer will slow

banking activity when it overheats and will encourage lending when times are tough i.e. in

bad times. The buffer will range from 0% to 2.5%, consisting of common equity or other

fully loss-absorbing capital.

(d) Minimum Common Equity and Tier 1 Capital Requirements : The minimum

requirement for common equity, the highest form of loss-absorbing capital, has been raisedunder Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier 1 capital

requirement, consisting of not only common equity but also other qualifying financial

instruments, will also increase from the current minimum of 4% to 6%. Although the


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minimum total capital requirement will remain at the current 8% level, yet the required

total capital will increase to 10.5% when combined with the conservation buffer.

(e) Leverage Ratio: A review of the financial crisis of 2008 has indicted that the value ofmany assets fell quicker than assumed from historical experience. Thus, now Basel III

rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative

amount of capital to total assets (not risk-weighted). This aims to put a cap on swelling of

leverage in the banking sector on a global basis. 3% leverage ratio of Tier 1 will be tested

before a mandatory leverage ratio is introduced in January 2018.

(f) Liquidity Ratios: Under Basel III, a framework for liquidity risk management will becreated. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are

to be introduced in 2015 and 2018, respectively.

(g) Systemically Important Financial Institutions (SIFI) : As part of the macro-prudential

framework, systemically important banks will be expected to have loss-absorbing

capability beyond the Basel III requirements. Options for implementation include capital

surcharges, contingent capital and bail-in-debt.

Comparison of Capital Requirements under Basel II and Basel III :

Requirements UnderBasel

II

Under BaselIII

Minimum Ratio of Total

Capital To RWAs 8% 10.50%

Minimum Ratio ofCommon Equity to RWAs 2%

4.50% to7.00%

Tier I capital to RWAs 4% 6.00% Core Tier I capital toRWAs 2% 5.00%

Capital ConservationBuffers to RWAs None 2.50%


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Leverage Ratio None 3.00%

Countercyclical Buffer None 0% to2.50% Minimum LiquidityCoverage Ratio None TBD (2015)

Minimum Net StableFunding Ratio None TBD (2018)

Systemically importantFinancial InstitutionsCharge

None TBD (2011)

How Inflation is Measured in India:

Inflation is usually measured based on certain indices. Broadly, there are two categories of

indices for measuring inflation i.e. Wholesale Prices and Consumer Prices. There are certain

sub-categories for these indices.

What is an Index Number :

An Index number is a single figure that shows how the whole set of related variables has

changed over time or from one place to another. In particular, a price index reflects the

overall change in a set of prices paid by a consumer or a producer, and is conventionally

known as a Cost-of-Living index or Producer's Price Index as the case may be.

Price Indexes / Indices used in India :

In India we use five major national indices for measuring inflation or price levels.

(A) The Wholesale Price Index (base 1993-94) is usually considered as the headline inflation

indicator in India.


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(B) In addition to Whole Price Index ( WPI ), there are four different consumer price indices which

are used to assess the inflation for different sections of the labour force. These are discussed in

more details later on.

(C) In addition to above five indices , the GDP deflator as an indicator of inflation is

available for the economy as a whole and its different sectors, on a quarterly basis

Now let us discuss the above indices used in India to measure inflation in detail

to understand these better.

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Wholesale Price Index (WPI) :

This index is the most widely used inflation indicator in India. This is published

by the Office of Economic Adviser, Ministry of Commerce and Industry. WPI

captures price movements in a most comprehensive way. It is widely used by

Government, banks, industry and business circles. Important monetary and

fiscal policy changes are linked to WPI movements. It is in use since 1939 and is

being published since 1947 regularly. We are well aware that with the changing

times, the economies too undergo structural changes. Thus, there is a need for

revisiting such indices from time to time and new set of articles / commodities are

required to be included based on current economic scenarios. Thus, since 1939,

the base year of WPI has been revised on number of occasions. The current

series ofWholesale Price Index has 2004-05 as the base year. Latest revision of

WPI has been done by shifting base year from 1993-94 to 2004-05 on the


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recommendations of the Working Group set upwith Prof Abhijit Sen,, Member,

Planning Commission as Chairman for revision of WPI series. This new series

with base year 2004-05 has been launched on 14th September, 2010. A brief on

the historical development of this WPI is given below : -

Base Year Year of Introduction No of Items inIndex

No of PriceQuotations

Week ended 19th August1939 1942 23 23

End August 1939 1947 78 215 1952-53 (1948-49 as weightbase) 1952 112 555

1961-62 July 1969 139 774 1970-71 January 1977 350 1295 1981-82 July 1989 447 2371 1993-94 April 2000 435 1918 2004-05 September 2010 676 5482

Earlier, the concept of wholesale price covered the general idea of capturing all

transactions carried out in the domestic market. The weights of the WPI did not

correspond to contribution of the goods concerned either to value - added or final

use. In order to give this idea a more precise definition, it was decided to define

the universe of the wholesale price index as comprising as far as possible all

transactions at first point of bulk sale in the domestic market.

Click Here to Get More Details About:

Methodology, Basket and Weights Adopted for Revised Index Numbers

of Wholesale Prices in India with Base Year 2004-05 = 100
http://www.allbankingsolutions.com/Banking-Tutor/Report-WPI-Revision-2004-05-Base-Year.pdfhttp://www.allbankingsolutions.com/Banking-Tutor/Report-WPI-Revision-2004-05-Base-Year.pdfhttp://www.allbankingsolutions.com/Banking-Tutor/Report-WPI-Revision-2004-05-Base-Year.pdfhttp://www.allbankingsolutions.com/Banking-Tutor/Report-WPI-Revision-2004-05-Base-Year.pdfhttp://www.allbankingsolutions.com/Banking-Tutor/Report-WPI-Revision-2004-05-Base-Year.pdf


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The first three are compiled by the Labour Bureau in the Ministry of Labour and

Employment, and the fourth is compiled by Central Statistical Organisation (CSO) in theMinistry of Statistics and Programme Implementation. These four CPIs reflect the effect

of price fluctuations of various goods and services consumed by specific segments of

population in the country. These indices did not encompass all the segments of the

population and thus, did not reflect the true picture of the price behaviour in the country

as a whole.

Some of the Data for 2012 for above indices :

WPI (Allcommodities)

WPI - InflationRate

CPI(IW)

CPI - AL -Point toPoint

CPI - RuralLabourers

CPI - RL -Point toPoint

Base Period 2001=100 Point Inflation 1986-87=100 Inflation 1986-87=100 Inflation

Period Jan-12 158.70 7.23 198.00 5.32 618.00 4.92 619.00 5.27

Feb-12 159.30 7.56 199.00 7.57 621.00 6.34 623.00 6.68Mar-12 161.00 7.69 201.00 8.65 625.00 6.84 626.00 7.19Apr-12 163.50 7.50 205.00 10.22 633.00 7.84 634.00 8.01

May-12 163.90 7.55 206.00 10.16 638.00 7.77 640.00 8.11Jun-12 164.20 7.25 208.00 10.05 646.00 8.03 648.00 8.54Jul-12 164.80 6.87 212.00 9.84 656.00 8.61 658.00 8.94

New Series of CPI Started in 2012

Therefore, there was a strong feeling that there is a need for compiling CPI for entire

urban and rural population of the country to measure the inflation in Indian economy

based on CPI. Thus, now Central Statistics Office (CSO) of the Ministry of Statistics and

Programme Implementation has started compiling a new series of CPI for the


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(a) CPI for the entire urban population viz CPI (Urban);

(b) CPI for the entire rural population viz CPI (Rural)

(c) Consolidated CPI for Urban + Rural will also be compiled based on above two CPIs

These would reflect the changes in the price level of various goods and services consumed

bythe Urban and rural population. These new indices are now compiled at State / UT and

all India levels.

The CPI inflation series is wider in scope than the one based on the wholesale price

index (WPI), as it has both rural and urban figures, besides state-wise data. The new series,with 2010 as the base year, also includes services, which is not the case with the WPI

series. However, this new series will become comparable only in 2013 when the data for

2012 will also be available for comparison.

A comparison of this new series with WPI is given below :-

WPI CPI - New

Series wef Feb2012

Base Year 2004-05 2010

Elemenetary Items 676 200 (Weighteditems) Weightage o Foodproducts (%) 243 49.71

Weightage of Energyproducts (%) 14..91 9.49

Weightage ofMiscellaneous Items(%)

Servicesnotincluded

26.31

Some of the Data Released under this New Series :


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Period Rural - CPI /

Annual Inflation -Prov

Urban - CPI / AnnualInflation - Prov.

Combined - CPI / AnnualInflation (Prov.)

May 2012 119.1 117.1 118.2 June 2012 117.5 118.5 119.6

July 2012 122.6 9.76%

119.9 10.0%

121.4 9.86%

Producer Price Indexes (PPI)

These are indices that measure the average change over time in selling prices by producers

of goods and services. They measure price change from the point of view of the seller.Majority of OECD countries measure inflation based on Producer Price Indiex (PPI) while

only some others use WPI. Countries like Japan, Greece, Norway and Turkey use WPI.

Already WPI has been replaced in most of the countries by PPI due to the broader

coverage provided by the PPI in terms of products and industries and the conceptual

concordance between PPI and system the national account. PPI is considered to be more

relevant and technically superior compared to one at wholesale level. However, in India

we are still continuing with WPI.

Cost-of-living indices (COLI):

This is different from CPI. This index aims to measure the effects of price changes on the

cost of achieving a constant standard of living (i.e. level of utility or welfare) as distinct

from maintaining the urchasing power to buy a fixed consumption basket of good and

services. Maintaining a constant standard of living does not imply continuing to consume

a fixed basket of goods and services. A COLI allows for the fact that households who seek

to maximize their welfare from a given expenditure can benefit by adjusting their

expenditure patterns to take account of changing relative prices by substituting goods that


40/49

have become relatively cheaper, for goods that have become relatively dearer. The use or

preference for a particular goods may also change.

.

In the long run, the various PPIs, WPIs and the CPI show a similar rate of inflation. In the

short run PPIs often increase before the WPI and CPI. Investors generally follow the CPI

more than the PPIs. In India WPI is used instead of CPI.

In News Recently :

What is Core Inflation : The concept is used to estimate the inflation by excluding food

and energy prices from the basket of goods and services that represents a typical

household's consumption. In mid 2012, RBI Governor threw up the conundrum posed by

this "Core"inflation by saying "In our economy, where food constitutes nearly 50% of

consumption basket and fuel has a weight of 15%, can a measure of inflation that excludes

them can be called "Core". He suggested that India should move towards developing and

using a Producer Price Index (PPI) to gauge inflation more accurately as wholesale price

index does not capture the price movement of services and is a hybrid of consumer and

lproducer lprice quotes.

Click Here to know : What is Inflation, What is Deflation, What is Stagflation,

What is Hyperinflation etc.

What is Cheque Truncation System or CTS 2010 :
http://www.allbankingsolutions.com/Banking-Tutor/Inflation.htmhttp://www.allbankingsolutions.com/Banking-Tutor/Inflation.htmhttp://www.allbankingsolutions.com/Banking-Tutor/Inflation.htmhttp://www.allbankingsolutions.com/Banking-Tutor/Inflation.htmhttp://www.allbankingsolutions.com/Banking-Tutor/Inflation.htm


41/49

The full form of CTS is Cheque Truncation System. RBI has decided to

launch this system and all banks across India are required to follow RBI

guidelines in this regard. As per RBI guidelines, now all banks have to issue

cheques conforming to the CTS 2010 standards with uniform features.

How is CTS 2010 will be different from earlier system of cheque clearance?

Under the CTS system, the physical movement of cheques between banks

will be elminated. At present , when you issue a cheque to someone, he has

deposit the cheque in his bank to get credit. Then this cheque movesphyscially from his bank to your bank which involves a lot of time and

risk. Now under CTS, instead of physical movement of the cheque, an

electronic image of the cheque will be transmitted to the drawee branch /

bank. The presenting bank will retains the physical cheque. Along with the

electronic image, certain key relevant information is also transmitted, such as date of

presentation, presenting bank details, data on the MICR band.

What is the purpose of CTS 2010 or What are the benefits of CTS?

The new process is being adopted to reduce the scope of frauds as the new

standardized cheques will have number of security features. The system

will also help in speed clearance of chequess and thus customers will be

able to get faster credit to their accounts. This will happen as there will beno physical movement of the cheuqes and hence time is saved and risk of

loss of cheques in transit are totally eliminated.


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When will the CTS begin ? :

RBI has originally decided that CTS will be effective from 1st January 2013,

but then it was announced that it will be effective from 1st April, 2013.

However, as per RBI guidelines dated 18th March, 2013, now this

deadlines has been revised and it will be effective from 1st August,

2013 (i.e. non CTS cheques will be valid till 31st July, 2013).

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"RBI will review the deadline in June 2013. Cheque issuing banks shall make all efforts to

withdraw the non-CTS-2010 Standard cheques in circulation before the extended timeline of

31 July 2013 by creating awareness among customers through SMS alerts, letters, display

boards in branches/ATMs, log-on message in internet banking, notification on the web-site

etc, RBI said.

What are the features of cheques issued under CTS ? :

(a) Cheque printer details : This is printed on the extreme left hand side of the

cheque. The printer details along with the words CTS -2010 is mentioned along the

area where you tear off the leaf from the cheque book.

(b) Rupee symbol : The new symbol of the Indian rupee is printed beside the area

where the amount in figures needs to be written.

(c) Details of the bank and its logo : The bank details and its logo are printed on the

face of the cheque. However, it is printed in invisible ink.


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(d) Signature space indicator : The words please sign above are mentioned

indicating the space where you will need to sign the cheque.

(e) VOID pantograph : This is a wavelike design, which is visible to the naked eye andseen below the area where the account number is printed.

The above set of minimum security features would ensure uniformity across all cheque

forms issued by banks in the country which in turn will help presenting banks while

scrutinising / recognising cheques of drawee banks in an image-based processing scenario.

The homogeneity in security features is expected to act as a deterrent against cheque

frauds, while the standardisation of field placements on cheque forms would enablestraight-through-processing by use of optical / image character recognition technology.

The benchmark prescriptions are collectively known as "CTS-2010 standard". Indian

Banks Association (IBA) and National Payments Corporation of India (NPCI) are co-

ordinating with the banks on implementation of the new standard. Accordingly, the

cheques issued are tested and certified by NPCI and only after such cerification the

cheques would be issued to the customers.

What Should Cheque Book Holders Should Do :

(a) You should ensure that you use only CTS-2010 compliant cheque leaves

from April 1, 2013.

(b) You can check if you hold a CTS compliant cheque book by verifying ifthe cheque leaves have the features mentioned above. You need to apply in

your bank for the same and it is available free of cost.

(c) If you have any unused cheque leaves with you, these must be

surrendered in your bank.


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(d) In case you have given old post dated cheques (like for your Housing

Loan or Auto Loan) to some body, you must exchange them with the CTS-

compliant cheques immediately.

RBI has advised that though non CTS-2010 standard cheques will continue

to be accepted post July 31, 2013, they will be cleared at less frequent

intervals and may incur additional charges. RBI has advised to preferably

use dark coloured ink while writing CTS cheques. Major Recommendations by the 2 nd Narasimham Committee on Banking Sector

Reforms

In early 1997, Mr.Narasimham was again asked to chair another committee to review the progress based on the

1st Committee report and to suggest a new vision for Indian banking industry. In April, 1998, Narasimham Committee

submitted its report and recommended some major changes in the financial sector. Many of these recommendations have

been accepted and are under process of implementation.

These recommendations can be broadly classified into following categories :-

(A) Strengthening Banking System

(B) Asset Quality

(C) Prudential Norms and Disclosure Requirements

(D) Systems and Methods in Banks (E) Structural Issues

(A) Strengthening Banking System RECOMMEDNATION PRESENT STATUS

Capital adequacy requirements should take into account market

risks in addition to the credit risks RBI has already implemented the same as market

risks already taken into account for investment

portfolio.

In the next three years the entire portfolio of government

securities should be marked to market and the schedule for the

same announced at the earliest (since announced in the

monetary and credit policy for the first half of 1998-99);

government and other approved securities which are now

subject to a zero risk weight, should have a 5 per cent weight

for market risk.

More stringent norms under Basel II already

implemented.


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Risk weight on a government guaranteed advance should be the

same as for other advances. This should be made prospective

from the time the new prescription is put in place.

This has already been implemented by RBI.

Foreign exchange open credit limit risks should be integrated

into the calculation of risk weighted assets and should carry a

100 per cent risk weight


implemented.

Minimum capital to risk assets ratio (CRAR) be increased from

the existing 8 per cent to 10 per cent; an intermediate minimum

target of 9 per cent be achieved by 2000 and the ratio of 10 per

cent by 2002; RBI to be empowered to raise this further forindividual banks if the risk profile warrants such an increase.

Individual banks' shortfalls in the CRAR be treated on the same

line as adopted for reserve requirements, viz. uniformity across

weak and strong banks. There should be penal provisions for

banks that do not maintain CRAR.


implemented.

Public Sector Banks in a position to access the capital market at

home or abroad be encouraged, as subscription to bank capital

funds cannot be regarded as a priority claim on budgetary

resources.

Public sector banks are already accessing the

capital market, e.g. PNB, Canara Bank, UCO

Bank, Union Bank etc. have already successfully

launched IPOs.

(B) Asset Quality

An asset be classified as doubtful if it is in the

substandard category for 18 months in the first

instance and eventually for 12 months and loss if it

has been identified but not written off. These norms

should be regarded as the minimum and brought

into force in a phased manner

NPA norms have been implemented


46/49

For evaluating the quality of assets portfolio,

advances covered by Government guarantees,

which have turned sticky, be treated as NPAs.

Exclusion of such advances should be separately

shown to facilitate fuller disclosure and greatertransparency of operations

These are yet to be implemented.

For banks with a high NPA portfolio, two

alternative approaches could be adopted. One

approach can be that, all loan assets in the doubtful

and loss categories, should be identified and their

realisable value determined. These assets could be

transferred to an Assets Reconstruction Company(ARC) which would issue NPA Swap Bonds

First Asset Reconstruction Company was

established during June, 2002.

An alternative approach could be to enable the

banks in difficulty to issue bonds which could form

part of Tier II capital, backed by government

guarantee to make these instruments eligible for

SLR investment by banks and approved

instruments by LIC, GIC and Provident Funds

Tier II bonds are being issued by the Banks, but

these are not eligible for SLR investments by

banks.

The interest subsidy element in credit for the

priority sector should be totally eliminated and

interest rate on loans under Rs.2 lakhs should be

deregulated for scheduled commercial banks as has

been done in the case of Regional Rural Banks and

cooperative credit institutions

(C ) Prudential Norms and Disclosure Requirements

In India, income stops accruing when interest or

installment of principal is not paid within 180 days,

which should be reduced to 90 days in a phased

manner by 2002.

Implemented w.e.f. year ending 31/03/2004.


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Introduction of a general provision of 1 per cent on

standard assets in a phased manner be considered

by RBI.

Already implemented

As an incentive to make specific provisions, they

may be made tax deductible

(D) Systems and Methods in Banks

There should be an independent loan review

mechanism especially for large borrowal accounts

and systems to identify potential NPAs. Banks may

evolve a filtering mechanism by stipulating in-

house prudential limits beyond which exposures on

single/group borrowers are taken keeping in view

their risk profile as revealed through credit rating

and other relevant factors

The major banks have already implemented

these exposure limits. Slowly other banks are

also progressing in this field.

Banks and FIs should have a system of recruiting

skilled manpower from the open market Banks are already recruiting specialist officers

from the open market.

Public sector banks should be given flexibility to

determined managerial remuneration levels taking

into account market trends.

This is partially being implented

There may be need to redefine the scope of external

vigilance and investigation agencies with regard to

banking business.

There is need to develop information and control

system in several areas like better tracking ofspreads, costs and NPSs for higher profitability,

accurate and timely information for strategic

decision to identify and promote profitable products

and customers, risk and asset-liability management;

and efficient treasury management.

Risk Management, Asset Liability Management

and improvement in treasury have already beenintroduced in banks.


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(E) Structural Issues

With the conversion of activities between banksand DFIs, the DFIs should, over a period of time

convert themselves to bank. A DFI which converts

to bank be given time to face in reserve equipment

in respect of its liability to bring it on par with

requirement relating to commercial bank.

The process has already started. ICICI Ltd. Hasconverted itself into a bank by merger with

ICICI Bank Ltd. IDBI, SIDBI too have

followed the same.

Mergers of Public Sector Banks should emanate

from the management of the banks with the

Government as the common shareholder playing a

supportive role. Merger should not be seen as a

means of bailing out weak banks. Mergers between

strong banks/FIs would make for greater economic

and commercial sense.

Indian Banks have yet to take cue from this

recommendation and are apprehensive of the

mergers.

Weak Banks' may be nurtured into healthy units by

slowing down on expansion, eschewing high cost

funds / borrowings etc.

Government is already taking steps in this

direction

The minimum share of holding by

Government/Reserve Bank in the equity of the

nationalised banks and the State Bank should be

brought down to 33%. The RBI regulator of the

monetary system should not be also the owner of a

bank in view of the potential for possible conflict of

interest

These are yet to be implemented

There is a need for a reform of the depositinsurance scheme based on CAMELs ratings

awarded by RBI to banks.

Inter-bank call and notice money market and inter-

bank term money market should be strictly

restricted to banks; only exception to be made is

RBI has already taken number of seps inthis direction.


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primary dealers.

Non-bank parties be provided free access to bill

rediscounts, CPs, CDs, Treasury Bills, MMMF.

RBI should totally withdraw from the primary

market in 91 days Treasury Bills.

classification of government accounting in india for a specific treatment of government accounts in...

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