RBI as Banker to Government



One of the important role of RBI is being Banker to Governments - GOI & State Govts. It doesn't get much public attention because it does not directly impact prices/ policy rates/ GDP figures of the country. However it's an important role of RBI. RBI also gives financial advice to govt, whenever called to do so.

RBI - banker to Government.

Legal Framework:


RBI Act 1934:

RBI has the 'obligation' to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Union.


RBI has the 'right' to transact Government business of the Union in India.

Accordingly RBI is also banker to all State Govts, as per the agreements they enter into, except J&K and Sikkim.

RBI does NOT get any remuneration for the conduct of ordinary banking business other than the advantages which may accrue to it from the holding of their cash balances free of obligation to pay interest thereon.


Banker to Central Govt:

Work relating to Govt. business is handled by Public Accounts Dept of RBI. Govt's Principal accounts are maintained at Central Accounts Section in Nagpur. Duties involve receipt & payment of moneys on behalf of various govt dept.


Each ministry/Dept has been allotted a Public Sector Bank for handling it's transactions based on principle of 'One Bank - One Ministry/Dept'. The responsibility of maintenance of accounts lies with individual Ministry/Department only. This includes arranging payments, accounting receipt, disbursal, auditing of transaction. RBI does NOT handle day-to-day transactions as before, except where nominated.


Banker to State Govts:


The financial transactions of State Govts are done at various agency bank branches in respective states. All the transaction are consolidated at 'Link cell' in State Capital & settled with RBI office in the state. All consolidated position are then ultimately booked in Principal Accounts of the resp. State maintained @ CAS (Central Accounts Section) Nagpur.

Meanwhile transactions at various agency offices (RBI, SBI, Nationalized banks' branches, treasuries etc) are done without any reference to cash position of the State Govt @ CAS.



Central Accounts (CAS@ Nagpur):

Each agency bank has set up a 'Link office' in Nagpur, for fund settlement with CAS. All the financial transactions thus merge into CAS Nagpur, which work out daily cash balance of each Govt.

RBI sends daily, monthly advice of balance in its books, ways & means granted, investments made to respective Govts. This is useful for govts in preparing 'Ways & Means budgets'.



Other Services:

Besides receipt & payment of money on behalf of Govts. RBI performs other services to govts for which it may receive nominal fees, often this don't even cover costs!

Being Banker to govt RBI provides: exchange, handle forex transaction of GOI, remittance transactions, management of public debt & issue of new loans, invest surplus funds, issue & management of special funds, bonds, pension schemes, safe custody facility and act as Adviser to Govt on various Monetary & economic perspectives.


Reforms:


a) Computerization: RBI's endeavor is to help common person to pay Govt's dues at bank branch of his choice, while ensuring instantaneous credit to Govt's a/c @ RBI.

RBI & Govts are working towards computerization of dealing branches, CAS, all PAOs (Pay & Accounts Offices)/ Circle Offices of Govt/ Drawing offices/ Treasury offices.

It is envisaged that real-time settlement of funds would handle shortcomings observed in manual system of handling transactions. Reconciliation at every level will be quicker with increased accuracy.


Instead of paper scrolls, Govt depts are geared up for accepting the same in e-format. Earlier all deposits in Govt's a/cs were to be accompanied by appropriate challans. Challans were in multiple copies, different shapes, sizes. Paying taxes & accounting for same was cumbersome, time-consuming process.

With the progress in banking it is possible for assesses to pay govt's dues using single pay-in-slip. Later electronically just by quoting PAN!


OLTAS (On-Line Tax Accounting System) introduced in 2004, for collection of Direct Taxes is a step in that direction. OLTAS can be accessed through Net-banking of Agency Banks & taxes can be paid by common taxpayer in minutes.



b) Expansion in Agency Banks: At present all public sector banks & 3 private sector banks (Axis, HDFC, ICICI bank) act as RBI's agent to do Govt business.

Agreement between State Govt & RBI provide that the RBI is not entitled for any remuneration for ordinary banking operations apart from the advantages which may accrue from holding cash balances free of obligation to pay interest thereon. However minimum balances doesn't adequately compensate RBI for the cost of conducting Govt's business.


Presently 'Agency commission' is given to commercial banks by RBI. This merely covers the cost of doing the transaction. In most of the countries this cost is borne by Govts themselves.

RBI is trying to create a climate of competition for Govt Business. It's suggested that system of 'bidding' would rationalize agency charges better rather than present 'cost system'


For more information read FAQs by RBI & speech by Sh. YV Reddy (former RBI Governor).



25 richest countries of the world

Top 25 countries of world in GDP per capita (nominal) terms.



Rank GDP per capita Country
1 $1,06,406  Luxembourg
2 $1,04,756  Qatar
3 $99,170  Norway
4 $78,881   Switzerland
5 $67,304  Australia
6 $56,426  Denmark
7 $54,815  Sweden
8 $52,300  Canada
9 $52,052  Singapore
10 $51,704  United States
11 $48,761  Kuwait
12 $46,707  Japan
13 $46,643  Austria
14 $46,011  Netherlands
15 $45,984  Ireland
16 $45,635  Finland
17 $43,774  United Arab Emirates
18 $43,615  Belgium
19 $42,725  Iceland
20 $42,402  Brunei
21 $41,866  Germany
22 $41,223  France
23 $39,161  United Kingdom
24 $38,255  New Zealand
25 $36,676  Hong Kong




India has a GDP per capita of $3,842. India finds place in lower portion of the list.

elasticity concepts Part 2

Elasticity concepts part 2

This note is in continuation of this Elasticity concept article. Now here we are in bit technical side. If you've read 1st article, it'll clear your "technical" knowledge. And make your answers perfect.

1) Price Elasticity of Demand (PED): 

is a measure which shows how much demand of a good will change in response to change in price of that good.

Price Elasticity of Demand = % change in quantity demanded / % change in Price

Here are various scenarios that happen:

If PED is 0, then the demand for that good is said to be perfectly price inelastic (or not responsive to change in price). That means even if there is an increase in price, people will still buy that stuff. Economists doubt if such product exists.


When PED is between 0 & 1, demand is said to be price inelastic i.e change in demand is less than change in price. If price changes 5% demand changes by 2%. Businesses try to evaluate PED to know how much change in price of their product will increase it's demand or sales!

Remember Apple iPhone 5C sales - low cost version but not much demand.


When PED is 1, it's said to be perfectly price elastic. That means 2% change in price will increase demand (or sales) of a good by 2% exactly.

If PED is more than 1, than it's said to be price elastic. That means change in demand is more than change in price. For e.g. if Burger price change by 2% than demand changes by say 3%.




2) Income Elasticity of Demand (YED):



(remember letter 'I' is for Investment, so Y for income): is a measure which shows how much demand of a good or service will change in response to change in real Income levels.

Income Elasticity of Demand = % change in quantity demanded / % change in income


If YED is between 0-1: demand is said to be income inelastic. For 'normal goods' with say 3% increase in income, demand will increase by 1%. For Inferior goods with 3% increase in income, demand will reduce by 1%.

If YED is more than 1: demand is said to be income elastic. For 'normal goods' with say 1% increase in income, demand increases by 2%.


When XED is +ve two goods are subtitutes, -ve then they are compliments. Size of XED tells the strength on the connection between 2 goods.



 4) Price Elasticity of Supply (PES):


 is a measure which shows responsiveness or elasticity of the quantity supplied of a good to changes in price of that good.

Price Elasticity of Demand = % Change in Quantity Supplied / % Change in Price.


When PES is 0: suppliers don't care about price, they continue producing whatever they were producing earlier. Perfectly inelastic supply.

When PES is between 0 &1: inelastic supply, supply don't change in as much proportion as price. If price increase by 2%, supply would change by 1%.

When PES is 1: supply is unitary elastic. If price increase by 1%, supply change by 1%.

When PES above 1: elastic supply, if price increase by 1%, supply change by 2%.



creditors meaning

Creditor: is the one (person, bank, entity) who lends money.


Creditor gives credit (not receives credit). 

This term is opposite to Debtors (one who borrows money).

One way I remember meaning of creditor is by this statement: "creditor is predator". If you owe money to a creditor he'll constantly pester you for money! ;)


There are 2 types:

a) Un-secured creditor: 

This type of credit is not secured by any collateral (security). It's like your Credit Card, who has lend you some money. And they usually charge more interest rates for that!

b) Secured creditor: 

Real creditors (banks, finance companies etc) gives credit after legal contracts only. If they fail to receive their money back - they can take things to court. Their Loan is against some asset only, which they can sell if they don't receive back their money.



25 Important Currencies of World

Important International Currencies:



Here are some extremely important currencies from MCQs point of view. They've been asked in many competitive exams:

  
  1.    Malaysian - Ringgit
  2.    Thailand - Bhat
  3.    China  - Yuan Renminbi
  4.    South Korean - Won
  5.    Japanese  - Yen
  6.    New Zealand - Dollar $
  7.    Swedish  - Krona
  8.    U.S. - Dollar 
  9.    Australian - Dollar 
  10.    Canadian -  Dollar 
  11.    Hong Kong -  Dollar
  12.    Singapore - Dollar
  13.    Swiss - Franc
  14.    Russia - Rubal
  15.    UAE - Dirham
  16.    Turkish - Lira
  17.    British - Pound
  18.    Argentina  - Peso
  19.    Chile -  Peso
  20.    Columbia -  Peso
  21.    Maxico - Peso
  22.    Brazil - Real
  23.    South Africa - Rand
  24.    Philippines - Peso
  25.    Indonesian - Rupiah
   

4 important concepts of Elasticity made simple

4 Elasticity Concepts in 5 Minutes


Elasticity is a very basic economics concept. It's used in many economics studies. When you complete this page, you'll be able to grasp it & use it in your answers in such a way that professors, interviewers would love to listen:


Elasticity is how flexible demand/supply is in response
to a change in price (or other variable).


1) Price Elasticity of Demand (PED): 


What does it means? It simply means if you change price of a product how'll demand for it will behave.

Suppose you are CEO of a company you would try to figure out how much change in price of your product will increase its demand or sales!

If you're CEO of some luxury stuffs co. then probably reducing price won't help you much. Because if it's not pricey then its not luxury. Isn't it?


Price In-elastic Demand: Apple iPhone 5C 


PED, price elasticity demand, economics, rbi grade b, sbi po, ibps,
iPhone 5C pic by flickr janitor

Apple launched both iPhone 5S (high end) & 5C (ridiculed as C for cheap) According to some reports iPhone 5C sales were not impressive. And some intellectuals are criticizing Apple for venturing into low-cost mobiles as their price & cult-culture is what separates it from others. May be that's why the legendary Steve Jobs never actually gave any thought of making "cheaper mobiles".

So we would say demand of iPhone 5C is price inelastic! Demand is not responding to change in pricing. Another way to see it: if price were reduced by 40%, demand increased by may be 2-3% - that's what we call price in-elasticity.


Price elastic Demand: Burgers


Take another case: What if you are CEO of McDonald? Reduce price or not. Well, here is some piece of news, reduce price & increase sales. So when you reduce prices by say 25% & demand increase by say 40% then we say Burger sales (demand) are price elastic!


Now lets see another easy concept.

2) Income Elasticity of Demand (YED):

(letter 'I' is for Investment, so Y for income).

What does it means? It simply means if you change real Income levels how'll Demand behave.

Normal Goods & Inferior Goods

With increase in real income demand for 'normal goods' increase. More money with people they'll spend it.

However there are some goods whose demand will decrease with increasing income for e.g. bus tickets because people will take taxis, cars etc. such goods are called 'Inferior goods'.


Luxury goods are more income elastic than necessities. Because people will buy luxuries with rise in income!


Consider this: When your income goes up, what would you do? Buy Apple iPhone - 5S of course, eat out with friends in expensive restaurants, go for holidays... and so on. You are creating more demand by spending more, because now your income is more.


What if your income goes down? Probably you'll eat at home, prefer low-cost types of mobiles, take public transport instead of taxis etc.


Here's a study to understand these concepts better - don't go into too much details just read Executive summary only. But before that read this Elasticity part 2. Here's excerpt:

"An average income elasticity of 1.65 is estimated for inbound tourism. A 1% increase in GDP (Income)... would lead to an increase in tourism expenditure in the UK of 1.65%."


That's roughly to say that if you raise income by 1%, Britishers tourism expenditure increase by 1.65%. So hotel-room demands are income elastic!

YED, income elasticity demand, economics, rbi grade b, sbi po, ibps,
Jumeriah Hotel by flickr adteasdale


3) Cross Elasticity of Demand (XED):

 is a measure which shows how much demand of a good will change in response to change in price of another good.


Coke & Pepsi are 2 subtitute goods. If coke reduce it's price, Pepsi sales will be affected.

Tea & Chai-Masala are 2 pretty strong compliments ;). Tea & Sugar can be said as good compliments.




4) Price Elasticity of Supply (PES):

What does it means? It simply means if you change prices of a good how'll (& how quickly) supply behave.


Now suppose you are an Onion supplier!

Should I tell you more? I don't think so if you are in India. When prices increase, you would rush to book max profit. You'll increase supply & sell more & more...


PES tells us how quickly suppliers are able to react to the price change. If suppliers are able to react quickly we say the supply is price elastic.


So Onion supply is price elastic.

Supply is said to be price inelastic when suppliers are not able to increase supply when price is high. Similarly they are not able to restrict supply when price goes down.


Suppose you're Onion farmer, what would you do when prices shoots up. Actually you can't do anything because onion corps are ready in 5 months. By the time your fields are ready prices would come down.

A very important concept in it is: Commodities like Agricultural produce, Mining are price inelastic.

But if seen over a longer period of time then even commodities are elastic. If Basmati rice fetch good price for farmers, then over a longer period of time, farmers will produce more of it!





Banking News Notes Dec 2013

Important Banking News: 

This piece of information is must read for bank exams:


-> Paperless banking facility: Axis Bank Ltd has launched the e-KYC initiative to facilitate paperless banking to Aadhaar card holders at Mumbai. With this step, Axis Bank became the first bank to allow customers to open an account with just their Aadhaar number.




->SARFAESI Act: The most effective tool to recover bad loans; Amidst rising NPAs, the SARFAESI Act was the most potent tool in the hands of banks for recovering bad loans as the Act empowers banks to recover NPAs without the intervention of courts by providing three alternative methods — securitisation, asset reconstruction and enforcement of security — without the intervention of courts. 


According to the RBI’s Report on Trend and Progress of Banking in India, 2012-13, banks have recovered Rs 18,500 crore through the Sarfaesi route. Also, in terms of efficiency, the Act has proved to be more effective than the DRTs or mediation by Lok Adalats. 

“Under the Sarfaesi Act, notice is served and two-months’ time is given to the borrower to discharge his liabilities, but DRTs (despite clear instructions from the Supreme Court that they cannot give stay orders on Sarfaesi) are still giving stay orders and eventually, the stay order is lifted but in the process one to one-and-a-half years is lost, without any benefit to any party. 


Also, the rising levels of stress across the banking system was reflected in the fact that the number of cases under all the three mechanisms saw a massive increase of 66 per cent to 10.45 lakh cases.



-> Bharatiya Mahila Bank (BMB) will offer 4.5% on Savings Bank balances up to Rs 1 lakh and 5% on balances above Rs 1 lakh. 

Set up with a capital base of Rs 1,000 crore, is the first bank started in the public sector space by an Act of Parliament (other public sector banks were nationalised in two tranches in 1969 and 1980). It will predominantly serve women customers, it will serve men too.



-> Technology-related banking frauds in India have fallen in the last four years due to stepping up checks on on-line transactions by the banks. According to the RBI Data, during current financial year, 8765 tech-related frauds were reported, a 13% drop over the previous fiscal.


-> Liquidity support to MSME sector: The liquidity support comes in the wake of slowdown in the economy which has resulted in liquidity tightness in a large number of MSEs in the manufacturing and services sector, particularly due to delayed settlement of receivables from large corporate, public sector undertakings and government departments.

 In view of the need to ease the liquidity stress to micro and small enterprises (MSE) sector which is employment intensive and contributes significantly to exports, RBI has been to provide refinance of an amount of Rs. 5,000 crore to the Small Industries Development Bank of India (SIDBI) under the provisions RBI Act, 1934. The facility will be available up to March 31, 2014.




-> FI limit in AXIS Bank increased: The Cabinet committee on economic affairs (CCEA) has approved the proposal of Axis Bank for increase in foreign investment from 49% to 62% entailing an inflow of about Rs 7,250 crore. Following the inflow and hike in stake by foreign investors, the bank will become foreign-owned, whereby every future investment in seven subsidiaries will be governed by the foreign direct investment policy.



-> Next commonwealth summit in 2015: Malta, a Southern European country was unanimously chosen as the host of the next Commonwealth summit



-> New CMD for corporation bank: S. R. Bansal


-> New MCX-SX chairman: Former Union Home Secretary G.K. Pillai has been appointed as Chairman of MCXSX.