Notes on Indian Financial Sector (Economy) What is KYC ?

NOTES ON INDIAN FINANCIAL SECTOR ( ECONOMY) 

Q1. What is RTGS System? Ans. The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later time.'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable. 

Q2. How RTGS is different from National Electronics Funds Transfer System (NEFT)? Ans. NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place with all transactions received till the particular cut-off time. These transactions are netted (payable and receivables) in NEFT whereas in RTGS the transactions are settled individually. For example, currently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays. Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business hours. 

Q. 3. What is an Automated Teller Machine (ATM)? Ans. Automated Teller Machine is a computerized machine that provides the customers of banks the facility of accessing their account for dispensing cash and to carry out other financial & non-financial transactions without the need to actually visit their bank branch. 

Q.4. What type of cards can be used at an ATM? Ans. The ATM debit cards, credit cards and prepaid cards (that permit cash withdrawal) issued by banks can be used at ATMs for various transactions. 

Q. 5. What are the services/facilities available at ATMs? Ans. In addition to cash dispensing ATMs may have many services/facilities enabled by the bank owning the ATM such as: Account information Cash Deposit Regular bills payment Purchase of Re-load Vouchers for Mobiles Mini/Short Statement Loan account enquiry etc. 

Q.6. How can one transact at an ATM? Ans. For transacting at an ATM, the customer inserts /swipes his/her Card in the ATM and entershis/herPersonal Identification Number(PIN) issued by his/her bank. 

Q.7. What is Personal Identification Number (PIN)? Ans. PIN is the numeric password which is separately mailed / handed over to the customer by the bank while issuing the card. Most banks require the customers to change the PIN on the first use. 

Q8. What is Electronic Clearing Service (ECS)? Ans : ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium etc. Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa. 

Q.9. What are the variants of ECS? In what way are they different from each other? Ans : Primarily, there are two variants of ECS - ECS Credit and ECS Debit. ECS Credit is used by an institution for affording credit to a large number of beneficiaries (for instance, employees, investors etc.) having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the user institution. ECS Credit enables payment of amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution. ECS Debit is used by an institution for raising debits to a large number of accounts (for instance, consumers of utility services, borrowers, investors in mutual funds etc.) maintained with bank branches at various locations within the jurisdiction of a ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for payment of telephone / electricity / water bills, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium etc., that are periodic or repetitive in nature and payable to the user institution by large number of customers etc. 

Q.10 What is a Non-Banking Financial Company (NBFC)? ANS - A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company). 

Q 11. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ? ANS . NBFCs are doing functions akin to that of banks; however there are a few differences: (i) an NBFC cannot accept demand deposits; (ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and (iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks. 

 Q.12 What is Guilt Fund ? Gilt funds, as they are conveniently called, are mutual fund schemes floated by asset management companies with exclusive investments in government securities. The schemes are also referred to as mutual funds dedicated exclusively to investments in government securities. Government securities mean and include central government dated securities, state government securities and treasury bills. The gilt funds provide to the investors the safety of investments made in government securities and better returns than direct investments in these securities through investing in a variety of government securities yielding varying rate of returns gilt funds, however, do run the risk.. The first gilt fund in India was set up in December 1998. 

Q13. What is a Government Security? A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities. a. Treasury Bills (T-bills) Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. For example, a 91 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and would be redeemed at the face value of Rs.100/-. The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price (for calculation of yield on Treasury Bills ). The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills. Payments for the T-bills purchased are made on the following Friday. The 91 day T-bills are auctioned on every Wednesday. The Treasury bills of 182 days and 364 days tenure are auctioned on alternate Wednesdays. T-bills of of 364 days tenure are auctioned on the Wednesday preceding the reporting Friday while 182 T-bills are auctioned on the Wednesday prior to a non-reporting Fridays. The Reserve Bank releases an annual calendar of T-bill issuances for a financial year in the last week of March of the previous financial year. The Reserve Bank of India announces the issue details of T-bills through a press release every week. b. Cash Management Bills (CMBs) Government of India, in consultation with the Reserve Bank of India, has decided to issue a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Like T-bills, they are also issued at a discount and redeemed at face value at maturity. The tenure, notified amount and date of issue of the CMBs depends upon the temporary cash requirement of the Government. The announcement of their auction is made by Reserve Bank of India through a Press Release which will be issued one day prior to the date of auction. The settlement of the auction is on T+1 basis. The non-competitive bidding scheme (referred to in paragraph number 4.3 and 4.4 under question No. 4) has not been extended to the CMBs. However, these instruments are tradable and qualify for ready forward facility. Investment in CMBs is also reckoned as an eligible investment in Government securities by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949. First set of CMBs were issued on May 12, 2010. c. Dated Government Securities Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years. The nomenclature of a typical dated fixed coupon Government security contains the following features - coupon, name of the issuer, maturity and face value. For example, 7.49% GS 2017 would mean: Coupon : 7.49% paid on face value Name of Issuer : Government of India Date of Issue : April 16, 2007 Maturity : April 16, 2017 Coupon Payment Dates : Half-yearly (October 16 and April 16) every year Minimum Amount of issue/ sale : Rs.10,000 In case there are two securities with the same coupon and are maturing in the same year, then one of the securities will have the month attached as suffix in the nomenclature. For example, 6.05% GS 2019 FEB, would mean that Government security having coupon 6.05 % that mature in February 2019 along with the other security with the same coupon, namely,, 6.05% 2019 which is maturing in June 2019. 

 Q.14. What are the Open Market Operations (OMOs)? OMOs are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels 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, the RBI will buy securities from the market, thereby releasing liquidity into the market. 

Q.15 Negotiated Dealing System The Negotiated Dealing System (NDS) for electronic dealing and reporting of transactions in government securities was introduced in February 2002. It facilitates the members to submit electronically, bids or applications for primary issuance of Government Securities when auctions are conducted. NDS also provides an interface to the Securities Settlement System (SSS) of the Public Debt Office, RBI, Mumbai thereby facilitating settlement of transactions in Government Securities (both outright and repos) conducted in the secondary market. Membership to the NDS is restricted to members holding SGL and/or Current Account with the RBI, Mumbai. 

Q.16. What is Money Market? While the Government securities market generally caters to the investors with a long term investment horizon, the money market provides investment avenues of short term tenor. Money market transactions are generally used for funding the transactions in other markets including Government securities market and meeting short term liquidity mismatches. By definition, money market is for a maximum tenor of up to one year. Within the one year, depending upon the tenors, money market is classified into: i. Overnight market - The tenor of transactions is one working day. ii. Notice money market – The tenor of the transactions is from 2 days to 14 days. Iii. Term money market – The tenor of the transactions is from 15 days to one year. 

Q.17 Call money market Call money market is a market for uncollateralized lending and borrowing of funds. This market is predominantly overnight and is open for participation only to scheduled commercial banks and the primary dealers 

Q.18 What is Repo market Repo or ready forward contact is an instrument for borrowing funds by selling securities with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed. 

Q.19 What is Reverse Repo? The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds against buying of securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent. 

Q.20 Commercial Paper (CP) Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Corporates, primary dealers (PDs) and the all-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India are eligible to issue CP. CP can be issued for maturities between a minimum of 7 days and a maximum up to one year from the date of issue. 

Q.21 Certificate of Deposit (CD) Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Banks can issue CDs for maturities from 7 days to one a year whereas eligible FIs can issue for maturities 1 year to 3 years. 

Q.22 What is Coupon The rate of interest paid on a debt security as calculated on the basis of the security’s face value 

Q.23 What is Discount When the price of a security is below the par value, it is said to be trading at discount. The value of the discount is the difference between the FV and the Price. For example, if a security is trading at Rs.99, the discount is Rs.1. 

Q.24 What is Duration(Macaulay Duration) Duration of a bond is the number of years taken to recover the initial investment of a bond. It is calculated as the weighted average number of years to receive the cash flow wherein the present value of respective cash flows are multiplied with the time to that respective cash flows. The total of such values is divided by the price of the security to arrive at the duration. 

 Q.25 Face Value Face value is the amount that is to be paid to an investor at the maturity date of the security. Debt securities can be issued at varying face values, however in India they typically have a face value of Rs.100. The face value is also known as the repayment amount. This amount is also referred as redemption value, principal value (or simply principal), maturity value or par value 

Q.26 Floating-Rate Bond Bonds whose coupon rate is re-set at predefined intervals and is based on a pre-specified market based interest rate. 

Q.27 Gilt/ Government Securities Government securities are also known as gilts or gilt edged securities. “Government security” means a security created and issued by the Government for the purpose of raising a public loan or for any other purpose as may be notified by the Government in the Official Gazette and having one of the forms mentioned in The Government Securities Act, 2006. 

Q.28 Market Lot Market lot refers to the standard value of the trades that happen in the market. The standard market lot size in the Government securities market is Rs. 5 crore in face value terms. 

Q.29 Maturity Date The date when the principal (face value) is paid back. The final coupon and the face value of a debt security is repaid to the investor on the maturity date. The time to maturity can vary from short term (1 year) to long term (30 years). 

Q.30 Odd Lot Transactions of any value other than the standard market lot size of Rs. 5 crore are referred to as odd lot. Generally the value is less than the Rs. 5 crore with a minimum of Rs.10,000/-. Odd lot transactions are generally done by the retail and small participants in the market. 

Q.31 Par Par value is nothing but the face value of the security which is Rs. 100 for Government securities. When the price of a security is equal to face value, the security is said to be trading at par. 

Q.32 Premium When the price of a security is above the par value, the security is said to be trading at premium. The value of the premium is the difference between the price and the face value. For example, if a security is trading at Rs.102, the premium is Rs.2. 

Q.33Price The price quoted is for per Rs. 100 of face value. The price of any financial instrument is equal to the present value of all the future cash flows. The price one pays for a debt security is based on a number of factors. Newly-issued debt securities usually sell at, or close to, their face value. In the secondary market, where already-issued debt securities are bought and sold between investors, the price one pays for a bond is based on a host of variables, including market interest rates, accrued interest, supply and demand, credit quality, maturity date, state of issuance, market events and the size of the transaction. 

Q.34 Primary Dealers In order to accomplish the objective of meeting the government borrowing needs as cheaply and efficiently as possible, a group of highly qualified financial firms/ banks are appointed to play the role of specialist intermediaries in the government security market between the issuer on the one hand and the market on the other. Such entities are generally called Primary dealers or market makers. In return of a set of obligations, such as making continuous bids and offer price in the marketable government securities or submitting reasonable bids in the auctions, these firms receive a set of privileges in the primary/ secondary market. 

Q.35 Real Time Gross Settlement (RTGS) system RTGS system is a funds transfer mechanism for transfer of money from one bank to another on a “real time” and on “gross” basis. This is the fastest possible money transfer system through the banking channel. Settlement in “real time” means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. “Gross settlement” means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is taken as final and irrevocable. 

Q.36 Repo Rate Repo rate is the return earned on a repo transaction expressed as an annual interest rate. 

Q.37 Repo/Reverse Repo Repo means an instrument for borrowing funds by selling securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government or foreign securities, with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the fund borrowed. Reverse Repo means an instrument for lending funds by purchasing securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government or foreign securities, with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the fund lent. 

Q.38 Residual Maturity The remaining period until maturity date of a security is its residual maturity. For example, a security issued for an original term to maturity of 10 years, after 2 years, will have a residual maturity of 8 years. 

Q.39 Secondary Market The market in which outstanding securities are traded. This market is different from the primary or initial market when securities are sold for the first time. Secondary market refers to the buying and selling that goes on after the initial public sale of the security. 

Q.40 Treasury Bills Debt obligations of the government that have maturities of one year or less is normally called Treasury Bills or T-Bills. Treasury Bills are short-term obligations of the Treasury/Government. They are instruments issued at a discount to the face value and form an integral part of the money market. 

Q.41 Underwriting The arrangement by which investment bankers undertake to acquire any unsubscribed portion of a primary issuance of a security. 

Q.42 Yield The annual percentage rate of return earned on a security. Yield is a function of a security’s purchase price and coupon interest rate. Yield fluctuates according to numerous factors including global markets and the economy. 

Q.43 Yield to Maturity (YTM) Yield to maturity is the total return one would except to receive if the security is being held until maturity. Yield to maturity is essentially the discount rate at which the present value of future payments (investment income and return of principal) equals the price of the security. 

Q.44. Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route? Ans. FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors: i) Retail Trading (except single brand product retailing) ii) Atomic Energy iii) Lottery Business iv) Gambling and Betting v) Business of Chit Fund vi) Nidhi Company vii) 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) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003). viii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005). ix) Trading in Transferable Development Rights (TDRs). x ) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes. 

Q.45 What are the regulations pertaining to issue of ADRs/ GDRs by Indian companies? Ans. Indian companies can raise foreign currency resources abroad through the issue of ADRs/ GDRs, in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India thereunder from time to time. A company can issue ADRs / GDRs, if it is eligible to issue shares to persons resident outside India under the FDI Scheme. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs. 

Q.46. What are the regulations regarding Portfolio Investments by SEBI registered Foreign Institutional Investors (FIIs)? Ans. Investment by SEBI registered FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000, as amended from time to time. FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts as Nominee Companies, Incorporated / Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies. SEBI acts as the nodal point in the registration of FIIs. The Reserve Bank of India has granted general permission to SEBI Registered FIIs to invest in India under the Portfolio Investment Scheme (PIS). Investment by SEBI registered FIIs and its sub accounts cannot exceed 10per cent of the paid up capital of the Indian company. However, in case of foreign corporates or High Networth Individuals (HNIs) registered as sub accounts of an FII, their investment shall be restricted to 5 per cent of the paid up capital of the Indian company. All FIIs and their sub-accounts taken together cannot acquire more than 24 per cent of the paid up capital of an Indian Company. An Indian company can raise the 24 per cent ceiling to the sectoral cap / statutory ceiling, as applicable, by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by their General Body. The Indian company has to intimate the raising of the FII limit to the Reserve Bank to enable the Bank to notify the same on its website for larger public dissemination. 

Q.47 What are the different types of accounts which can be maintained by an NRI / PIO in India? If a person is NRI or PIO, s/he can, without the permission from the Reserve Bank, open, hold and maintain the different types of accounts given below with an Authorised Dealer in India, i.e., a bank authorised to deal in foreign exchange. NRO Savings accounts can also be maintained with the Post Offices in India. However, individuals/ entities of Bangladesh and Pakistan require the prior approval of the Reserve Bank. Three types of accounts which can be maintained by an NRI / PIO in India i). Non-Resident (Ordinary) Rupee Account (NRO Account) NRO accounts may be opened / maintained in the form of current, savings, recurring or fixed deposit accounts. Savings Account - Normally maintained for crediting legitimate dues /earnings / income such as dividends, interest etc.The interest rates on NRO Savings deposits shall be at the rate applicable to domestic savings deposits. Currently the interest rate is 3.5 per cent. Term Deposits - Banks are free to determine the interest rates. Account should be denominated in Indian Rupees. ii). Non-Resident (External) Rupee Account (NRE Account) NRE account may be in the form of savings, current, recurring or fixed deposit accounts. Such accounts can be opened only by the non-resident himself and not through the holder of the power of attorney. NRE accounts cannot be held jointly with residents Account will be maintained in Indian Rupees. iii). Foreign Currency Non Resident (Bank) Account – FCNR (B) Account FCNR (B) accounts are only in the form of term deposits of 1 to 5 years All debits / credits permissible in respect of NRE accounts are permissible in FCNR (B) accounts also. Account can be in Pound Sterling, US Dollar, Japanese Yen, Euro, Canadian Dollar and Australian Dollar 

 Q.48 Can an individual resident borrow money from his close relatives outside India? Yes, an individual resident can borrow sum not exceeding USD 250,000 or its equivalent from his close relatives3 staying outside India, subject to the conditions that: i) the minimum maturity period of the loan is one year; ii) the loan is free of interest; and iii) the amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/FCNR account of the NRI. 

Q.49 Who is NRI ? A Non Resident Indian (NRI) is a person resident outside India, who is a citizen of India or is a person of Indian origin. 

Q.50 Who is NRO A Person of Indian Origin (PIO) for this purpose is defined in Regulation 2 of FEMA Notification ibid as a citizen of any country other than Bangladesh or Pakistan, if (a) he at any time held Indian passport; or (b) he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or (c) the person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b). 

Q.No. 51 Close relative' means relative as defined in Section 6 of the Companies Act, 1956. 

Q.No. 52A Person of Indian Origin' means an individual (not being a citizen of Pakistan or Bangladesh or Sir Lanka or Afghanistan or China or Iran or Nepal or Bhutan) who (i) at any time, held an Indian Passport or (ii) who or either of whose father or mother or whose grandfather or grandmother was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955). 

 Q.53. What is the Asian Clearing Union (ACU)? A. The Asian Clearing Union (ACU) was established with its head quarters at Tehran, Iran, on December 9, 1974 at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP), for promoting regional co-operation. The main objectives of a clearing union are to facilitate payments among member countries for eligible transactions on a multilateral basis, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade among the participating countries. 

Q54. Who are the members of the ACU? A. The Central Banks and the Monetary Authorities of Iran, India, Bangladesh, Bhutan, Nepal, Pakistan, Sri Lanka, Myanmar and Maldives are currently the members of the ACU. 

Q.55 . What does the priority sector comprise ? Ans : Broadly, the priority sector comprises the following : 1. Agriculture 2. Small scale industries (including setting up of industrial estates) 3. Small road and water transport operators (owning upto 10 vehicles). 4. Small business (Original cost of equipment used for business not to exceed Rs 20 lakh) 5. Retail trade (advances to private retail traders upto Rs.10 lakh) 6. Professional and self-employed persons (borrowing limit not exceeding Rs.10 lakh of which not more than Rs.2 lakh for working capital; in the case of qualified medical practitioners setting up practice in rural areas, the limits are Rs 15 lakh and Rs 3 lakh respectively and purchase of one motor vehicle within these limits can be included under priority sector) 7. State sponsored organisations for Scheduled Castes/Scheduled Tribes 8. Education (educational loans granted to individuals by banks) 9. Housing [both direct and indirect – loans upto Rs.5 lakhs (direct loans upto Rs 10 lakh in urban/ metropolitan areas), Loans upto Rs 1 lakh and Rs 2 lakh for repairing of houses in rural/ semi-urban and urban areas respectively]. 10. Consumption loans (under the consumption credit scheme for weaker sections) 11. Micro-credit provided by banks either directly or through any intermediaty; Loans to self help groups(SHGs) / Non Governmental Organisations (NGOs) for onlending to SHGs 12. Loans to the software industry (having credit limit not exceeding Rs 1 crore from the banking system) 13. Loans to specified industries in the food and agro-processing sector having investment in plant and machinery up to Rs 5 crore. 14. Investment by banks in venture capital (venture capital funds/ companies registered with SEBI) 

Q.56. What is the definition of ‘Small Scale Industries’ (SSI) ? Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs. 1 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. In the case of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 crore to be classified under small-scale industry. The investment limit of Rs.1 crore for classification as SSI has been enhanced to Rs.5 crore in respect of certain specified items under hosiery and hand tools by the Government of India (Note:Recently definition changed)

Q.57. What is the definition of ‘Tiny Enterprises’ ? The status of ‘Tiny Enterprises’ is given to all small scale units whose investment in plant & machinery is upto Rs. 25 lakhs, irrespective of the location of the unit. 

 Q.58. What are ‘Small Scale Service & Business Enterprises’ (SSSBE’s) ? Industry related service and business enterprises with investment upto Rs. 10 lakhs in fixed assets, excluding land and building will be given benefits of small scale sector. For computation of value of fixed assets, the original price paid by the original owner will be considered irrespective of the price paid by subsequent owners. 

Q.59. What are the weaker sections within the priority sector ? The weaker sections under priority sector include the following: Small and marginal farmers with land holding of 5 acres and less and landless labourers, tenant farmers and share croppers. Artisans, village and cottage industries where individual credit limits do not exceed Rs. 50,000/- Beneficiaries of Swarnjayanti Gram Swarojgar Yojana (SGSY) Scheduled Castes and Scheduled Tribes Beneficiaries of Differential Rate of Interest (DRI) scheme Beneficiaries under Swarna Jayanti Shahari Rojgar Yojana (SJSRY) Beneficiaries under the Scheme for Liberation and Rehabilitation of Scavangers (SLRS). Self Help Groups (SHGs) 

Q.60. What is the rate of interest for loans under priority sector ? As per the current interest rate policy, in the case of loans upto Rs 2 lakh, the interest rate should not exceed the prime lending rate (PLR) of the bank, while in the case of loans above Rs 2 lakh, banks are free to determine the interest rate 

 Q.61 What is the Banking Ombudsman Scheme? The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank customers for resolution of complaints relating to certain services rendered by banks. The Banking Ombudsman Scheme is introduced under Section 35 A of the Banking Regulation Act, 1949 by RBI with effect from 1995. 

 Q.62. Who is a Banking Ombudsman? The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services. 

Q.63. How many Banking Ombudsmen have been appointed and where are they located? As on date, fifteen Banking Ombudsmen have been appointed with their offices located mostly in state capitals. The addresses and contact details of the Banking Ombudsman offices have been provided in the annex. 

Q.64. Which are the banks covered under the Banking Ombudsman Scheme, 2006? All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme. 

 Q 65 What does the DICGC insure? In the event of a bank failure, DICGC protects bank deposits that are payable in India. The DICGC insures all deposits such as savings, fixed, current, recurring, etc. except the following types of deposits. (i) Deposits of foreign Governments; (ii) Deposits of Central/State Governments; (iii)Inter-bank deposits; (iv) Deposits of the State Land Development Banks with the State co-operative bank; (v) Any amount due on account of any deposit received outside India (vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India. 

Q 66 What is the maximum deposit amount insured by the DICGC? Each depositor in a bank is insured upto a maximum of Rs.1,00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same capacity and same right as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force. 

Q.67. What is KYC? KYC is an acronym for “Know your Customer”, a term used for customer identification process. It involves making reasonable efforts to determine true identity and beneficial ownership of accounts, source of funds, the nature of customer’s business, reasonableness of operations in the account in relation to the customer’s business, etc which in turn helps the banks to manage their risks prudently. The objective of the KYC guidelines is to prevent banks being used, intentionally or unintentionally by criminal elements for money laundering. KYC has two components - Identity and Address. While identity remains the same, the address may change and hence the banks are required to periodically update their records. 

Q.68. Is there any legal backing for verifying identity of clients? Yes. Reserve Bank of India has issued guidelines to banks under Section 35A of the Banking Regulation Act, 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. Any contravention thereof or non-compliance shall attract penalties under Banking Regulation Act.