SOME IMOPORTANT BANKING TRMINOLOGY

7/29/2019 SOME IMOPORTANT BANKING TRMINOLOGY

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SOME IMOPORTANT BANKING TRMINOLOGY

MICR: Magnetic ink char acter recognition

What is it: MICR code (pronounced my-ker) is a nine-digit number printed on banking instruments such

as a cheque or a demand draft using a special type of ink made of magnetic material. The first three

digits denote the city. The fourth to sixth digits denote the bank, while the last three digits denote the

branch number. The code is read by a machine, minimizing the chances of error in clearing of cheques,

thereby making funds transfer faster. For example, in the MICR code 400240019, 400 denotes Mumbai,

240 denotes HDFC Bank Ltd and 019 denotes the Colaba branch of the bank.

You will find the number on the right of the cheque number at the bottom of the cheque leaf.

When do you need it: MICR code allows money to drop directly into your bank account for payments

such as salaries and dividends. Your tax refund will come to you faster if you remember to mention this

on the refund form. Refunds of unwanted money in initial public offers, too, drop back if you put down

your code on the application form.

RTGS: Real time gross settlement

What is it: Its a fund transfer mechanism that enables money to move from one bank to another on a

real time and gross basis. Simply put, real time means the transaction is settled instantly without any

waiting period and gross means that it is not bunched with any other transaction.

You can transfer a minimum of Rs 2 lakh through RTGS; there is no upper ceiling though. The bank will

charge you Rs25-Rs50 for an outward RTGS transaction, inward transactions are free. RTGS is the fastest

inter-bank money transfer facility available through secure banking channels in India. But not all

branches in India are RTGS enabled. Visit the Reserve Bank of Indias (RBI) website for a list of branches

where you will get this facility. The RTGS customer service window for customers is available from 9.00

hours to 16.30 Monday to Friday and 9.00 to 13.30 on Saturdays.

When do you need it: This facility would be handy during an emergency, when you need to transfer

funds quickly, imagine an ill child studying in another city or a parent in an emergency situation and

needing money at once. You would be able to use this facility if you use Internet banking as a channel.

It is mostly used by high networth individuals and businessmen, who have at least Rs2 lakh to be

transferred business associates or clients.

NEFT: National electronic funds transferWhat is it: NEFT enables funds transfer from one bank to another but works a bit differently than RTGS

since the settlement takes place in batches rather than individually, making NEFT slower than RTGS.

The transfer is not direct and RBI acts as the service provider to transfer the money from one account to

another. You can transfer any amount through NEFT, even a rupee.

You wont have to pay any fee for inward transfer of funds, but for outward transactions the charges can

be from Rs5-Rs25 depending on the amount transferred.NEFT can be done 9.00hours to 19.00 hours on


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weekdays and on Saturdays 9.00 hours to 13.00 hours.

When do you need it: You can use this facility if you want to transfer funds online in a day or two.

NEFT can make life easier for those who need to send money to their parents or children living in

another city. It cuts the trouble of issuing a cheque or draft and posting it.

NEFT, too, can be done only through Internet banking. Visit RBI website for a list of branches where you

will get this facility.

IFSC: India financial system code

What is it: An 11-digit alphanumeric (letters and numbers) code that helps identify bank branches. The

first four numbers represent the banks code (alphabetic), the fifth number is a control character (0),

and the next six numbers denote a bank branch. For example, the IFSC for HDFC Bank Ltds Colaba

branch in Mumbai reads as HDFC0000085. This code is mentioned on your cheque. Different banks

mention it at different places on the cheque.

When do you need it: When sending money through RTGS or NEFT, you need to know the IFSC of the

receiving branch.

CVV: Card verification value

What is it: CVV is an anti-fraud security feature that helps verify that you are in possession of your credit

card and making the transaction. CVV is usually a three-digit number printed on the signature panel at

the back of your credit card.

When do you need it: You need this number when shopping online or over the phone. You need to be

careful with this number as it can make you a victim of fraud. Its best to remember this number and

blacken it off from your card.

PAP: Payable at par or MCC: Multi-city cheques

What is it: PAP or MCC cheques can be encashed anywhere in India, irrespective of the city they were

issued in. They are treated as local clearing cheques across the country. The amount is credited in the

account the same day and there are no inter-city collection charges associated with a normal cheques

being encashed in another city.

A cheque issued at a branch in Chennai, can be encashed at a branch in Dibrugarh as if it were a local

cheque.

There would be a notation on the top or the bottom of a cheque indicating its status as as PAP or MCC

cheque.When do you need it: By issuing a PAP or MCC cheque, you can save demand draft or cheque clearing

costs.

Usually, these cheques are issued by companies to disburse dividends or redemption amounts.

Different Types of Advances given by banks
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1. Demand Loan

In a demand loan account, the entire amount is paid to the debtor at one time, either in cash or by

transfer to his savings bank or current account. No subsequent debit is ordinarily allowed except by way

of interest, incidental charges, insurance premiums, expenses incurred for the protection of the security

etc. Repayment is provided for by instalment without allowing the demand character of the loan to be

affected in any way. There is usually a stipulation that in the event of any instalment, remaining unpaid,

the entire amount of the loan will become due. Interest is charged on the debit balance, usually with

monthly rests unless there is an arrangement to the contrary. No cheque book is issued. The security

may be personal or in the form of shares, Govt. paper, fixed deposit receipt, life insurance policies,

goods, etc.

2. Term Loan

When a loan is granted for a fixed period exceeding three years and is repayable according to the

schedule of repayment, it is known as a term loan. The period of term loan may extend up to 10 years

and in some cases up to 20 years. A term loan is generally granted for fixed capital requirements, e.g.

investment in plant and equipment, land and building etc. These may be required for setting up new

projects or expansion or modernization of the plant and equipment. Advances granted for purchasing

land / building / flat (Apartment house) are term loans.

3. Overdraft

An overdraft is a fluctuating account wherein the balance sometimes may be in credit and at other times

in debit. Overdraft facilities are allowed in current accounts only. Opening of an overdraft account

requires that a current account will have to be formally opened, and the usual account opening form

completed. Whereas in a current account cheques are honoured if the balance is in credit, the overdraft

arrangement enables a customer to draw over and above his own balance up to the extent of the limit

stipulated. For example, if there is a credit balance of Rs.40,000/- (approx. $890 USD) in a customer's

current account and an overdraft limit of Rs. 50,000/- (approx. $1,113 USD) is sanctioned to the party,

he can draw cheques up to Rs. 90,000/- (approx. $2,003 USD). There is no restriction, unlike in the case

of loans, on drawing more than once. In fact, as many drawings and repayments are permitted as the

customer would desire, provided the total amount overdrawn, i.e. the debit balance at any time does

not exceed the agreed limit. This is a satisfactory arrangement from the customer's point of view. He

need not hesitate to pay into the account any moneys for fear that an amount once paid in cannot be

drawn out or borrowed again, unlike in a loan account. As in the case of a demand loan account, the

security in an overdraft account may be either personal or tangible. The tangible security may be in the

form of shares, government paper, life insurance policies, fixed deposit receipts etc. i.e. paper securities.

A cheque book is issued in an overdraft account.

4. Cash Credit


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A cash credit is essentially a drawing account against credit granted by the bank and is operated in the

same way as a current account in which an overdraft limit has been sanctioned. The principal

advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan

basis, he may operate the account within the stipulated limit as and when required and can save

interest by reducing the debit balance whenever he is in a position to do so. The borrower can also

provide alternative securities from time to time in conformity with the terms of the advance and

according to his own requirements. Cash credits are normally granted against the security of goods e.g.

raw materials, stock in process, finished goods. It is also granted against the security of book-debts. If

there is good turnover both in the account and in the goods, and there are no adverse factors, a cash

credit limit is allowed to continue for years together. Of course a periodical review would be necessary.

5. Bills Purchased

Bills, clean or documentary, are sometimes purchased from approved customers in whose favour

regular limits are sanctioned. In the case of documentary bills, the drafts are accompanied by

documents of title to goods such as railway receipts or bills of lading (BOL). Before granting a limit, the

creditworthiness of the drawer is to be ascertained. Sometimes the financial standing of the drawees of

the bills are verified, particularly when the bills are drawn from time to time on the same drawees

and/or the amounts are large.

Although the term "Bills Purchased" seems to imply that the bank becomes the purchaser / owner of

such bills, it will be observed that in almost all cases, the bank holds the bills (even if they are indorsed

in its favour) only as security for the advance. In addition to any rights the banker may have against the

parties liable on the hills, he can also fully exercise a pledgee's right over the goods covered by the

documents.

6. Bills Discounted

Usance bills, maturing within 90 days or so after date or sight, are discounted by banks for approved

parties. In case a bill, say for Rs. 10,000/- (approx. $223 USD) due 90 days hence, is discounted today at

20% per annum, the borrower is paid Rs. 9,500/- (approx. $211 USD), its present worth. However the

full amount is collected from the drawee on maturity. The difference between the present worth and

the amount of the bill represents earning of the banker for the period for which the bill is to run. In

banking terminology this item of income is called "discount".


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FOREX Financial Instruments for interview questions

As a currency trader, there are numerous kinds of financial instruments that you can use. While retail

forex traders typically use foreign currency options as a hedging tool, banks are more likely to use

options, swaps and other more complicated derivatives to meet their particular hedging needs. Some of

the common financial instruments used in Forex are spot transactions, forwards, futures, swaps andoptions.

Spot Transaction A spot transaction is an agreement to buy or sell a currency at the current exchange

rate. In other words, its a simple exchange of one currency for another. It is generally settled within two

business days after the trade date and entails a cash exchange instead of the creation of a longer-term

contract.

The currencies are exchanged at the spot rate at the time of the contract. The spot rate is constantly

fluctuating as the value of currency moves up and down according to future expectations. Spot

transactions do not involve an immediate payment or settlement, with the settlement date usually setto the second business day after the trade date. The trade date is the date on which you agree to make

the transaction. The two-day period provides ample time to the traders to validate the agreement and

coordinate the clearing and required debiting and crediting of bank accounts. Interest is not included in

the pre-fixed transaction.

Spot transactions carry high risk because they do not provide protection against unfavorable

movements in exchange rates between pricing a contract and the need to buy/sell the foreign currency.

Currency traders use spot transactions to make profits in the same way as equity or commodity traders,

buying low and selling high.

Forwards Forwards transactions involve the buying or selling of foreign currency for settlement no less

than three days later, and at predetermined exchange rates. In short, a buyer and seller agree to trade

currency at a particular time and at a particular exchange rate, regardless of what the exchange rate is

when the transaction is actually made. A forward contract can also be arranged for up to a year in

advance.

By locking in a specific exchange rate, the trader is protected against currency fluctuations for the term

of the contract. Forward currency prices consist of the spot exchange rate (the rate at which the

currency could be purchased in a spot transaction) and the forward price, calculated from a forward

spread (the difference between the spot exchange rate and the forward price). Forward contracts are

not standardized and are not traded on exchanges.

This type of financial instrument enables the trader to take advantage of currently favorable exchange

rates at a future date, as well as protect the trader against the risk of exchange rate volatility.


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Futures A futures contract is a forward contract with a pre-determined

currency amount, maturity date and interest amount. A futures contact is an agreement to buy or sell a

currency in a designated future month at a price determined by the buyer and seller. They are

standardized and traded on futures exchanges such as the Chicago Mercantile Exchange (CME). A future

transaction is usually carried out within three months. Currency futures are always quoted in terms of

the currency value with respect to the US Dollar.

Swap In a swap transaction, one currency is exchanged for another for a specified length of time. The

transaction is reversed at a specified future date, in which the original amounts are swapped. The two

exchanges occur at different exchange rates. It is the difference in the two exchange rates that

determines the swap price. Swaps have various maturity periods. A swap is another form of forward

contract.

Options A currency option is similar to a futures contract, as it entails a fixed currency transaction at

some future point in time. A currency option gives the holder the right, but not the obligation, to either

buy from the option writer or to sell to the option writer a stated quantity of one currency in exchange

for another currency at a fixed rate of exchange. The fixed rate of exchange is called the strike price.

The option styles can be American or European. In an American-style option the option can be exercised

at any date before the agreed upon expiration. European options can only be exercised on the exercise

date, not before.The option holder pays a premium to the option writer for the option. The premium is

lost if the buyer does not exercise the option. Options protect the holder against the risk of unfavorable

changes in the exchange rates.

SOME BASIC TERMS USED IN BANKING

1. What is a Repo Rate?

A: Repo rate is the rate at which our banks borrow rupees from RBI. Whenever the banks have any

shortage of funds they can borrow it from RBI. A reduction in the repo rate will help banks to get money

at a cheaper rate. When the repo rate increases, borrowing from RBI becomes more expensive.

Which means when repo rate increases bank will get money from rbi at higher rate ===bank will lend to

customer at higher rate

higher repo===higher rate of loan by banks===reduction in flow of money as people will not take money

at higher rate only needy people will take......At present the Repo Rate is 8.50%(as on 30/1/12)

2. What is Reverse Repo Rate?

A: This is exact opposite of Repo rate. Reverse Repo rate is the rate at which Reserve Bank of India (RBI)

borrows money from banks. RBI uses this tool when it feels there is too much money floating in the


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banking system. Banks are always happy to lend money to RBI since their money is in safe hands with a

good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to

this attractive interest rates.

Banks are happy to lend to RBI because risk factor is negligible .....means if they lend to other parties

then there is a possibility of repayment failure

so this is also a tool to control flow of funds in economy. Reverse Repo Rate at present is 7.50%(as on

30/01/12)

3. What is CRR Rate?

A: Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides

to increase the percent of this, the available amount with the banks comes down. RBI is using this

method (increase of CRR rate), to drain out the excessive money from the banks.CRR as on 5.50%.(as on

30/1/12)

4. What is SLR Rate?

A: SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of

cash, or gold or govt. approved securities (Bonds) before providing credit to its customers.

SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the

expansion of bank credit. SLR is determined as the percentage of total demand and percentage of time

liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their

anytime demand. SLR is 24% as on 30/01/12.

5. What is Bank Rate?

A: Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on

the loans and advances that it extends to commercial banks and other financial intermediaries. Changes

in the bank rate are often used by central banks to control the money supply. Bank rate is 6% as on

30/01/12.

6. RTGS ?

A: Real Time Gross Settlement -- is a tool to transfer funds from one bank to another or to same bank

within india....

minimum limit---2 lakh

maximum limit---no limit

RTGS works on real time basis means money is transferred immediately as soon as it is recieved from


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customer it will take around 2 -3 hours

7. NEFT ?

A:National Electronic Fund Transfer --- is also a tool to transfer money within india

minimum limit-- re 1

maximum limit--there is no such maximum limit but people prefer rtgs above 2 lakh

NEFT works on batch system means unlike RTGS in NEFT money is transferred in batches like upto 12 if 3

customers have applied for neft then there money be transferred in batch then again when some

money is collected in given time slot then they will be transferred in next batch

8. Cheque ?

A: Cheque is a legal instrument to transfer money in writing signed by the person who deposited ,

addressed to the banker for paying money when demand arises ....

Now there are various types of cheques---

a-- Bearer Cheque---when the words or to the bearer is not cancelled on the cheque then it becomes

bearer cheque ....it is very risky as anyone having a cheque can ask for payment.

b-- Order cheque-- when word bearer is cancelled ....then payment be made to the party mentioned in

cheque .

c--Crossed Cheque-- when two parllel lines are drawn on cheque and word "Account Payee " is written

then its crossed cheque and the payment of these cheques cannot be obtained from counter of the

bank they are deposited in account only

9. Difference between repo rate and bank rate ?

A.

DIFFERENCE BETWEEN BANK RATE AND REPO RATE

BANK RATE ---- IT IS FOR M LONG TERM ..... AND IS THE OUTCOME OF MONETARY POLICY........BANK

RATE DECIDES THE RATE AT WHICH COMMERCIAL BANKS LEND TO CUSTOMER AS IF BANK RATE

INCREASES MEANS BORROWING FROM RBI BECOMES COSTLY


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REPO RATE---- IT IS FOR SHORT TERM...... BASICALLY TO MATCH THE WORKING CAPITAL NEEDS OF

BANKS.......IN THIS COMMERCIAL BANKS SELL THEIR SECURITIES TO RBI WITH AN AGREEMENT TO

REPURCHASE THEM AGAIN AT PRE SETERMINED RATE.

10. Depriciation ie. decrese of value of rupees against dollar ?

A.

suppose 1$==rs 50

means for purchasing every dollar u have to pay rs 50

now is this ratio becomes 1$==rs 55

then this means u have to pay more

now its impact..........

export sector will be benefited as when they export they get money in dollars and when they exchange

it for rupee then they get more money ..........

import will be discouraged as if u purachse something u have to pay in dollars and for this u have to first

change your currency in dollars and as rate is more so have to pay more so

this is called the situation of depricitaion where export is promoted and import is curatiled...

11. Inflation and Recession ?

A.

suppose u r a manufacturer of pen

u mark ur pen cost price is rs 10

if u get 12 on selling it is called inflation

if u get exactly ur cost price ie 10 then its deflation

and if u get below ur cost price ie rs 8 then its recession

so inflation is a situation when demand exceeds supply and hence producers charge more

recession is a situtaion when producers are not even able to get their cost price and hence after some

time forced to shut down their loss making company..

12. Merchant Banking ?

A. Merchant banking is concerned with ipo and fpo for issuing shares in market company has to appoint

a merchant banker who is responsible for all types approvals ,communications like from sebi, rbi etc and

merchant banker have to fulfill all roc (registrar of companies ) filling also.....


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13. Money Laundering ?

A. basically it means converting black money into white money by depositing it into bank........now what

happens is the money earned by drug trafficking or by some other such kind of process are referred as

black money ...........so money launderers deposit this amount in banks ............now there are chances

that they may be caught by banks as amount involved is too much...........so they deposit money in small

amounts and later on withdraw the same or they invest in some small investment schemes......

for getting rid of this KYC NORMS came into play ........ which means know your customer .......in this

customer ahve to deposit their verification ids and some like details with banks............

14. SEBI--SECURITIES AND EXCHANGE BOARD OF INDIA its functions ?

A. SEBI is a capital market regulator means all the capital transactions are goverened by sebi----

its major functions are---

a---protecting the interest of investor in securities market

b--promoting development of securities market

c---regulating the securities market......

15. IRDA---INSURANCE REGULATORY DEVELOPMENT AUTHORITY its functions ?

A. IRDA is the regulatory authority of insurance business

its functions are

a--protectinginterest of policy holders

b--specifing proper training,qualification etc to insurance people

c--levying fees ,commision etc for conducting insurance business

d--specifing the manner in which insurance company maintain their books of accounts

e--specifing margin of solvency

f--specifing general and life insurance business which company can take

16.Shadow Banking ?


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A.shadow banking means those financial transactions which are not regulated ..... hence the risk

involoved in these are very high..........shadow banking deals in money market instruments......and hence

need money for early repayment .......... now what happens is they invest for long term .....and borrow

for short term.......so this match creates problem coz of lack of liquidity...........and second thing as they

are not regulated so they cant take help from any other organisation like for eg central banks.........the

crisis which world faced during was coz of shadow banking also.

17. Shadow clearance ?

A. m explaining it by way of example

suppose sbi got 5 cheques from its customers for clearance and these cheques are of uco bank ...........no

what sbi will do is they make a bundle of these cheques and send it to uco bank for clearance

......meanwhile sbi will make entry in their customer account that cheques are being sent for clearance

and this entry is termed as shadow clearance..............and

when uco bank makes payment then sbi will regularise this shadow clearance and transfer the payment

in customer's account........

18. types of bank audit and appointment of auditor ?

A.

broadly banks have 3 types of audit---

1--internal audit

2--external audit

3--audit conducted by banks when some person takes loan to check whether he actually own the

property which he is going to mortgage or not

now coming to their appointment

external auditors or u can say statutory auditors are appointed by banks itself but there is some process

means banks have to get the list of auditors from CAG and then have to get consent from auditors

whether they are willing to work or not and they must not be disqualified to act as such .........and once

they get consent banks have to send their names to rbi for approval .....

in case of RRB bank have to get approval from central government

internal auditors are appointed by board of directors........

19. Double taxation avoidance agreement ?


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A.

double taxation aviodance agreement ie dtaa is concerned with international taxation

for eg--- a person from india wants to setup his induatry in mauritus so now he have to pay tax as per

indian law and as per mauritus law ..... so he is paying tax twice ..... so to avoid this double taxation dtaa

is signed by various countries......now he dont have to pay tax to the tax twice for same income....

20. Hedging ?

A. hedging is a tool by which risk can be minimised in forex market........ by taking money from low

interest rate country and investing where interest rate is high............for eg---- suppose mr.a wants a

loan of 1 lkh and in india he is getting loan at 5% and in america at 7% ...... so what he will do is he will

take loan from india and invest in america...... by this he will minimise risk and make profit

21. MAT(Minimum Alternate Tax)

A. MAT(minimum alternate tax) is a tax which industries have to pay even if they are operating in tax

free zone.........this concept came due to reliance........... what relaince do is they setup their industries in

tax free zone and enjoy whole profits without spending a penny on tax............ so govt made provisions

under which industries have to pay a minimum tax on their profit......

22. Inflationary gap ?

A. inflationary gap means difference between supply and demand above full employment

.............means if demand exceeds supply which country can produce at its extreme ..... then this gap is

called inflationary gap............. for eg ---- suppose country demands 10 units while its supply could only

be 5 units .... so the gap of 5 units is inflationary gap

23.fiat money

a. the money which is not backed by gold or such kind of reserves...... these are declared by govt thats y

they circulate in market .......


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FERA & FEMA

FERA & FEMA

When a business enterprise imports goods from other countries, exports its products to them or makes

investments abroad, it deals in foreign exchange. Foreign exchange means 'foreign currency' andincludes:- (i) deposits, credits and balances payable in any foreign currency; (ii) drafts, travellers'

cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any

foreign currency; and (iii) drafts, travellers' cheques, letters of credit or bills of exchange drawn by

banks, institutions or persons outside India, but payable in Indian currency.

In India, all transactions that include foreign exchange were regulated by Foreign Exchange Regulations

Act (FERA),1973. The main objective of FERA was conservation and proper utilisation of the foreign

exchange resources of the country. It also sought to control certain aspects of the conduct of business

outside the country by Indian companies and in India by foreign companies. It was a criminal legislation

which meant that its violation would lead to imprisonment and payment of heavy fine. It had manyrestrictive clauses which deterred foreign investments.

In the light of economic reforms and the liberalised scenario, FERA was replaced by a new Act called

the Foreign Exchange Management Act (FEMA),1999.The Act applies to all branches, offices and

agencies outside India, owned or controlled by a person resident in India. FEMA emerged as an investor

friendly legislation which is purely a civil legislation in the sense that its violation implies only payment

of monetary penalties and fines. However, under it, a person will be liable to civil imprisonment only if

he does not pay the prescribed fine within 90 days from the date of notice but that too happens after

formalities of show cause notice and personal hearing. FEMA also provides for a two year sunset clause

for offences committed under FERA which may be taken as the transition period granted for moving

from one 'harsh' law to the other 'industry friendly' legislation.Broadly,the objectives of FEMA are: (i) To facilitate external trade and payments; and (ii) To promote the

orderly development and maintenance of foreign exchange market. The Act has assigned an important

role to the Reserve Bank of India (RBI) in the administration of FEMA. The rules,regulations and norms

pertaining to several sections of the Act are laid down by the Reserve Bank of India, in consultation with

the Central Government. The Act requires the Central Government to appoint as many officers of the

Central Government as Adjudicating Authorities for holding inquiries pertaining to contravention of the

Act. There is also a provision for appointing one or more Special Directors (Appeals) to hear appeals

against the order of the Adjudicating authorities. The Central Government also establish an Appellate

Tribunal for Foreign Exchange to hear appeals against the orders of the Adjudicating Authorities and the

Special Director (Appeals). The FEMA provides for the establishment, by the Central Government, of a

Director of Enforcement with a Director and such other officers or class of officers as it thinks fit for

taking up for investigation of the contraventions under this Act.

FEMA permits only authorised person to deal in foreign exchange or foreign security. Such an authorised

person, under the Act, means authorised dealer,money changer, off-shore banking unit or any other

person for the time being authorised by Reserve Bank. The Act thus prohibits any person who:-


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**Deal Business Portal of India : Doing Business Abroad : Legal Aspects : Foreign Exchange Management

Act (FEMA)

**Make any payment to or for the credit of any person resident outside India in any manner;

**Receive otherwise through an authorized person, any payment by order or on behalf of any person

resident outside India in any manner;

**Enter into any financial transaction in India as consideration for or in association with acquisition or

creation or transfer of a right to acquire, any asset outside India by any person is resident in India which

acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable

property situated outside India

Qu. What is soft loan window ?

Ans. Extended term project financing made at below-market rates, especially in loans to developing

countries. Soft loans are made by the special lending facility of a multinational development bank (for

example, the Asian Development Fund and the African Development Fund) or the International

Development Association, an affiliate of the World Bank. Typically, soft loans have extended grace

periods in which only interest or service charges are due, longer (up to 50 years) amortization schedules,

and lower interest rates than conventional bank loans. Access to the soft loan window is limited to

developing countries with low per capita incomes, and developing countries experiencing balance of

payment problems.

Qu. BASEL NORMS ?

Financial Regulatory Bodies In India

The financial system in India is regulated by independent regulators in the field of banking, insurance,

capital market, commodities market, and pension funds. However, Government of India plays a

significant role in controlling the financial system in India and influences the roles of such regulators at

least to some extent.

The following are five major financial regulatory bodies in India:-

(A) Statutory Bodies via parliamentary enactments:

Reserve Bank of India : Reserve Bank of India is the apex monetary Institution of India. It is also called as

the central bank of the country.


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The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of

the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in

Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits

and where policies are formulated. Though originally privately owned, since nationalization in 1949,

the Reserve Bank is fully owned by the Government of India.

It acts as the apex monetary authority of the country. The Central Office is where the Governor sits and

is where policies are formulated. Though originally privately owned, since nationalization in 1949, the

Reserve Bank is fully owned by the Government of India. The preamble of the reserve bank of India is

as follows:

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary

stability in India and generally to operate the currency and credit system of the country to its

advantage."

Securities and Exchange Board of India : SEBI Act, 1992 : Securities and Exchange Board of India (SEBI)

was first established in the year 1988 as a non-statutory body for regulating the securities market. It

became an autonomous body in 1992 and more powers were given through an ordinance. Since then it

regulates the market through its independent powers.

Insurance Regulatory and Development Authority : The Insurance Regulatory and Development

Authority (IRDA) is a national agency of the Government of India and is based in Hyderabad (Andhra

Pradesh). It was formed by an Act of Indian Parliament known as IRDA Act 1999, which was amended in

2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the

interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry

and for matters connected therewith or incidental thereto."

(B) Part of the Ministries of the Government of India :

4. Forward Market Commission India (FMC) : Forward Markets Commission (FMC) headquartered at

Mumbai, is a regulatory authority which is overseen by the Ministry of Consumer Affairs, Food and

Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts

(Regulation) Act, 1952 This Commission allows commodity trading in 22 exchanges in India, out of

which three are national level.

5. PFRDA under the Finance Ministry : Pension Fund Regulatory and Development

Aulthority : PFRDA was established by Government of India on 23rd August, 2003. The Government

has, through an executive order dated 10th October 2003, mandated PFRDA to act as a regulator for the

pension sector. The mandate of PFRDA is development and regulation of pension sector in India.


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What is Bancassurance?

Bancassurance is a French term referring to the selling of insurance through a bank's established

distribution channels. In other words, we can say Bancassurance is the provision of insurance

(assurance) products by a bank. The usage of the word picked up as banks and insurance

companies merged and banks sought to provide insurance, especially in markets that have been

liberalised recently. It is a controversial idea, and many feel it gives banks too great a control over the

financial industry. In some countries, bancassurance is still largely prohibited, but it was recently

legalized in countries like USA when the Glass Steagall Act was repealed after the passage of the

Gramm Leach Bililey Act.

Bancassurance is the selling of insurance and banking products through the same channel, most

commonly through bank branches. Selling insurance.means distribution of insurance and other financial

products through Banks. Bancassurance concept originated in France and soon became a success story

even in other countries of Europe. In India a number of insurers have already tied up with banks and

some banks have already flagged off bancassurance through select products.

Bancassurance has become significant. Banks are now a major distribution channel for insurers, and

insurance sales a significant source of profits for banks. The latter partly being because banks can often

sell insurance at better prices (i.e., higher premiums) than many other channels, and they have low costs

as they use the infrastructure (branches and systems) that they use for banking.

Bancassurance primarily rests on the relationship the customer has developed over a period of time

with the bank. And pushing risk products through banks is a much more cost-effective affair for

an insurance company compared to the agent route, while, for banks, considering the falling interest

rates, fee based income coming in at a minimum cost is more than welcome.

Advantages of Bancassurance:

The following factors have mainly led to success of bancassurance

(i) Pressure on banks' profit margins. Bancassurance offers another area of profitability to banks with

little or no capital outlay. A small capital outlay in turn means a high return on equity.

(ii) A desire to provide one-stop customer service. Today, convenience is a major issue in managing a

person's day to day activities. A bank, which is able to market insurance products, has a competitive

edge over its competitors. It can provide complete financial planning services to its customers under one

roof.

(iii) Opportunities for sophisticated product offerings.

(iv) Opportunities for greater customer lifecycle management.

(v) Diversify and grow revenue base from existing relationships.

(vi) Diversify risks by tapping another area of profitability.

(vii) The realisation that insurance is a necessary consumer need. Banks can use their large base of

existing customers to sell insurance products.

(viii) Bank aims to increase percentage of non-interest fee income

(ix) Cost effective use of premises


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Various Models for Bancassurance

Various models are used by banks for bancassurance. (a) Strategic Alliance Model : Under this Model,

there is a tie-up between a bank and an insurance company. The bank only markets the products of

the insurance company. Except for marketing the products, no other insurance functions are carried out

by the bank. (b) Full Integration Model : This model entails a full integration of banking and

insurance services. The bank sells the insurance products under its brand acting as a provider of financial

solutions matching customer needs. Bank controls sales and insurer service levels including approach to

claims. Under such an arrangement the Bank has an additional core activity almost similar to that of

an insurance company. (c) Mixed Models: Under this Model, the marketing is done by the insurer's staff

and the bank is responsible for generating leads only. In other words, the database of the bank is sold to

the insurance company. The approach requires very little technical investment.

Status of Bancassurance in India

Reserve Bank of India (RBI) has recognized "bancassurance" wherein banks are allowed to provide

physical infrastructure within their select branch premises toinsurance companies for selling their

insurance products to the banks customers with adequate disclosure and transparency, and in turn

earn referral fees on the basis of premia collected. This would utilize the resources in the banking sector

in a more profitable manner.

Bancassurance can be important source of revenue. With the increased competition and squeezing of

interest rates spreads profit of the are likely to be under pressure. Fee based income can be increased

through hawking of risk products like insurance.

There is enormous potential for insurance in India and recent experience has shown massive growth

pace. A combination of the socio-economic factors are likely to makethe insurance business the biggest

and the fastest growing segment of the financial services industry in India.

However, before taking the plunge in to this new field, banks as insurers need to work hard on chalking

out strategies to sell risk products especially in an emerging competitive market. However, future is

bright for bancassurance. Banks in India have all the right ingredients to make Bancassurance a success

story. They have large branch network, huge customer base, enjoy customer confidence and have

experience in selling non-banking products. If properly implemented, India could take leadership

position in bancassurance all over the world

Government of India Notification dated August 3, 2000, specified Insurance as a permissible form of

business that could be undertaken by banks under Section 6(1)(o) of the Banking Regulation Act, 1949.

Then onwards, banks are allowed to enter the insurance business as per the guidelines and after

obtaining prior approval of Reserve Bank of India.

Guidelines for Banks for Entry of banks into Insurance business

1.Scheduled commercial bank would be permitted to undertake insurance business as agent

of insurance companies on fee basis, without any risk participation. The subsidiaries of banks will also be

allowed to undertake distribution of insurance product on agency basis.


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2. Banks which satisfy the eligibility criteria given below will be permitted to set up a joint venture

company for undertaking insurance business with risk participation, subject to safeguards. The

maximum equity contribution such a bank can hold in the joint venture company will normally be 50 per

cent of the paid-up capital of the insurance company. On a selective basis the Reserve Bank of India may

permit a higher equity contribution by a promoter bank initially, pending divestment of equity within

the prescribed period (see Note 1 below). The eligibility criteria for joint venture participant are as

under:-

(a) The net worth of the bank should not be less than Rs.500 crore;

(b) The CRAR of the bank should not be less than 10 per cent;

(c) The level of non-performing assets should be reasonable;

(d) The bank should have net profit for the last three consecutive years;

(e) The track record of the performance of the subsidiaries, if any, of the concerned bank should be

satisfactory.

3. In cases where a foreign partner contributes 26 per cent of the equity with the approval of Insurance

Regulatory and Development Authority/Foreign Investment Promotion Board, more than one public

sector bank or private sector bank may be allowed to participate in the equity ofthe insurance joint

venture. As such participants will also assume insurance risk, only those banks which satisfy the criteria

given in paragraph 2 above, would be eligible.

4. A subsidiary of a bank or of another bank will not normally be allowed to join the insurance

company on risk participation basis. Subsidiaries would include bank subsidiaries undertaking merchant

banking, securities, mutual fund, leasing finance, housing finance business, etc.

5. Banks which are not eligible as joint venture participant as above, can make investments up to 10% of

the networth of the bank or Rs.50 crore, whichever is lower, in the insurance company for providing

infrastructure and services support. Such participation shall be treated as an investment and should be

without any contingent liability for the bank. The eligibility criteria for these banks will be as under:

(i) The CRAR of the bank should not be less than 10%;

(ii)The level of NPAs should be reasonable;

(iii) The bank should have net profit for the last three consecutive years.

6. All banks entering into insurance business will be required to obtain prior approval of the Reserve

Bank. The Reserve Bank will give permission to banks on case to case basis keeping in view all relevant

factors including the position in regard to the level of non-performing assets of the applicant bank so as

to ensure that non-performing assets do not pose any future threat to the bank in its present or the

proposed line of activity, viz., insurance business. It should be ensured that risks involved in insurance

business do not get transferred to the bank and that the banking business does not get contaminated by

any risks which may arise from insurance business. There should be arms length relationship between

the bank and the insurance outfit.

Notes: -

1. Holding of equity by a promoter bank in an insurance company or participation in any form in

insurance business will be subject to compliance with any rules and regulations laid down by the

IRDA/Central Government. This will include compliance with Section 6AA of the Insurance Act as

amended by the IRDA Act, 1999, for divestment of equity in excess of 26 per cent of the paid up capital

within a prescribed period of time.


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2. Latest audited balance sheet will be considered for reckoning the eligibility criteria.

3. Banks which make investments under paragraph 5 of the above guidelines, and later qualify for risk

participation in insurance business (as per paragraph 2 of the guidelines) will be eligible to apply to the

Reserve Bank for permission to undertake insurance business on risk participation basis.

Inflation means that the general level of prices is going up, the opposite of deflation. More money will

need to be paid for goods (like a loaf of bread) and services (like getting a haircut at the hairdresser's).

Economists measure inflation regularly to know an economy's state. Inflation changes the ratio of

money towards goods or services; more money is needed to get the same amount of a good or service,

or the same amount of money will get a lower amount of a good or service. Economists defined

certain customer baskets to be able to measure inflation.

Types of Inflation Please see descriptions of the major types of inflation below.

Wage inflation - This is the typical situation in which demand exceeds supply (commonly referred to as

the "demand-pull" occurrence, or "excess demand inflation"). When wage inflation occurs, the prices for

the product or service increase, thus leading into the situation know as demand-pull. An example of this

would be the dramatic changes in the economy during war.

Pricing Power Inflation - Commonly known as the "Administered Price Inflation", this occurs when

business and individuals raise their prices retrospectively to increase their profits. On a side note, pricing

power inflation does NOT occur during economic depression or financial drops.

Cost-Push Inflation - When an increase of price occurs in regards to the produce or maintenance of a

service or product, the expected increase in price is the resultant effect. For an example, if a car

manufacturer paid more for a vital part of an engine, the labour cost would decrease to counter the new

price.

Sectoral Inflation - This occurs when the price of one product directly affects the price of another

product or service. For example, you take a daily bus to work. If the price of oil rose, the bus company

would have to ensure that their profit margin was not lost by raising the fare for tickets. This type of

inflation occurs generally across the retail aspect of the world, affecting prices when the production cost

increases for example.


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Stagflation - The is the situation in which the inflation continues to rise despite the economy not

following suit, in other words when prices rise even though the country is in recession. This type of

inflation can have disastrous effects but is generally a short lived form of inflation as it could potentially

lead to a financial crisis.

In addition to the types of inflation described above there are also certain degrees of inflation, such as;

Mild inflation being where there is a gradual but slow increase per annum in regards to the price. It can

show the the economy is growing in size, thus generating more jobs.

Strato-inflation can range from a low percentile to an extremely high percentile increase. Developing

countries experience this, or have done in the past.

Hyper inflation is an extremely accelerated form of inflation, occurring when the country imposing it is

in desperate need of the money - either to pay debts, fund development and so on.

Costs of inflation

Almost everyone thinks inflation is bad. Inflation affects different people in different ways. It also

depends on whether inflation is expected or not. If the inflation rate is equal to what most people are

expecting (anticipated inflation), then we can adjust and the cost is not as high. For example, banks can

change their interest rates and workers can negotiate contracts that include automatic wage hikes as

the price level goes up.

Problems arise when there is unanticipated inflation:

Creditors lose and debtors gain if the lender does not guess inflation correctly. For those who borrow,

this is similar to getting an interest-free loan.

Uncertainty about what will happen next makes corporations and consumers less likely to spend. This

hurts economic output in the long run.

People living off a fixed-income, such as retirees, see a decline in their purchasing power and,

consequently, their standard of living.


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The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more

have to be updated.

If the inflation rate is greater than that of other countries, domestic products become less competitive.

The EURO ZONE CRISIS

The eurozone crisis started in 2010 when doubts about its ability to service its debt made investors

reluctant to buy bonds issued by the Greek government. That reluctance spread to affect the bond

issues of several other eurozone members, and by late November 2011, it was affecting the bonds of all

of its members, including Germany. Measures agreed by eurozone leaders in a series of summits in the

course of 2011 were judged by the financial markets to have been insufficient to resolve the crisis.

Overview

The crisis started early in 2010 with the revelation that, without external assistance, the Greek

government would be forced to default on its debt. The rescue measures that were initially adopted by

the other eurozone governments took the form of conditional loans that enabled the Greek government

to continue to roll-over its maturing debts. In the course of 2010, however, investors' fears of sovereign

default by other eurozone governments increased their cost of borrowing, and further conditional loans

had to be provided to the governments of Ireland and Portugal. The crisis deepened when, in the latter

half of 20ll, it became evident that a default by the Greek government could no longer be avoided. On

October 26 2011, after prolonged negotiations, a rescue plan was agreed, involving a 50 per cent write-

off of the Greek government's debt; therecapitalisation of eurozone banks; and an increase in the

effective size of the European Financial Stability Facility. There were increases in the sovereign

spreads of Spain and Italy that were attributed to contagion from Greece, and eurozone leaders

prevailed upon the Italian government to take determined action to reduce its debt. Bond market

investors were not reassured. In mid November there were increases in the bond yields of other

eurozone countries including France, and on 24 November 2011 there was a partial failure of a German

government bond auction. Further measures agreed at the European Union summit of 9th December

2011 were judged by the markets to be insufficient to resolve the crisis. There were sharp falls in

consumer and business confidence in the second half of 2011.

Background to the crisis THE EUROZONE

Overview


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The eurozone was launched in 1991 as an economic and monetary union that was intended to increase

economic efficiency while preserving financial stability. Financial vulnerability to asymmetric shocks as a

result of disparities among member economies was intended to be countered in the medium term by

limits on public debt and budget deficits, and in the long term, by progressive economic convergence. By

the early years of the 21st century, however, it had became apparent that the fiscal limits could not be

enforced, and that membership had enabled the governments of some countries - notably Greece - to

borrow on more favourable terms than had previously been available. It had also become evident that

membership had reduced the international competitiveness of low-productivity countries - such as

Greece -, and that it had raised the competitiveness of high-productivity countries - such as Germany.

For those and other reasons, it now appears that there had been divergence rather than convergence

among the economies of the eurozone, and that their vulnerability to external shocks had beem

increased rather diminished.

Membership

In 1991, leaders of the 15 countries that then made up the European Union, set up a monetary union

with a single currency. There were strict criteria for joining (including targets for inflation, interest rates

and budget deficits), and other rules that were intended to preserve its members' fiscal

sustainability were added later. No provision was made for the expulsion of countries that did not

comply with its rules, nor for the voluntary departure of those who no longer wished to remain, but it

was intended to impose financial penalties for breaches.

Greece joined, what by then was known as the eurozone, in 2001, Slovenia in 2007, Cyprus and Malta in

2008, Slovakia in 2009. The current membership comprises Belgium, Germany Ireland, Greece, Spain,

France, Italy, Cyprus, Luxembourg, Malta, The Netherlands, Austria, Portugal, Slovenia, Slovakia, andFinland. Bulgaria, Czech Republic.

The non-members of the eurozone among members of the European Union are Denmark, Estonia,

Latvia, Lithuania, Hungary, Poland, Romania, Sweden and the United Kingdom.

The European Central Bank

The European Central Bank is the core of the "Eurosystem" that consists also of all the national central

banks of the member countries of the Union (whether or not they are members of the eurozone). Itsgoverning body consists of the six members of its Executive Board, and the governors of the national

central banks of the 17 eurozone countries. It is responsible for the execution of the Union's monetary

policy. Its statutory remit requires that, "without prejudice to the objective of price stability", it is to

"support the general economic policies in the Community" including a "high level of employment" and

"sustainable and non-inflationary growth". The bank's governing board sets the eurozone'sdiscount

rates and has been responsible for the introduction and management of refinancing operations . Article


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101 of the European Treaty expressly forbids the ECB from lending to governments and Article 103

prohibits the euro zone from becoming liable for the debts of member states.

The Bank is an independent decision-making body, being protected from political control by article 107

of the Maastricht Treaty: " , neither the ECB, nor a national central bank, nor any member of their

decisionmaking bodies shall seek or take instructions from Community institutions or bodies, from anygovernment of a Member State or from any other body". It takes decisions by majority voting, which

therefore cannot be vetoed by individual member-states.

The Stability and Growth Pact

The Stability and Growth Pact that was introduced as part of the Maastricht Treaty in 1992, set arbitrary

limits upon member countries' budget deficits and levels of public debtat 3 per cent and 60 per cent of

gdp respectively. Following multiple breaches of those limits by France and Germany, the pact has since

been renegotiated to introduce the flexibility announced as necessary to take account of changingeconomic conditions. Revisions introduced in 2005 relaxed the pact's enforcement procedures by

introducing "medium-term budgetary objectives" that are differentiated across countries and can be

revised when a major structural reform is implemented; and by providing for abrogation of the

procedures during periods of low or negative economic growth . A clarification of the concepts and

methods of calculation involved was issued by the European Union's The Economic and Financial Affairs

Council in November 2009 which includes an explanation of its excessive deficit procedure. According to

the Commission services 2011 Spring forecasts, the government deficit exceeded 3% of GDP in 22 of the

27 European Union countries in 2010.

The European Financial Stability Facility

In May 2010, the Council of Ministers established a Financial Stability Facility (EFSF) to assist eurozone

governments in difficulties "caused by exceptional circumstances beyond their control". It was

empowered to raise up 440 billion by issuing bonds guaranteed by member states . It was to

supplement an existing provision for loans of up to 60 billion by the European Financial Stability

Mechanism (EFSM), and loans by the International Monetary Fund. Proposals to leverage the 440

billion by loans from the European Central Bank were not authorised until October 2011. Loans are

subject to conditions negotiated with European Commission and the IMF, and accepted by the eurozone

Finance Ministers.

The EFSF and the EFSM are to be replaced in 2013 by a permanent crisis resolution regime, to be called

the European Stability Mechanism (ESM), which is to be a supranational institution, established by

international treaty, with an independent decision-making power.


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Pre-crisis performance

Neither a 1999-2008 growth rate comparison, nor a 2008-2011 growth rate comparison shows a

significant difference between the performance of the eurozone as a whole and of the European Union

as a whole, However, there is clear evidence that the Great Recession had imposed an asymmetric

shock on the eurozone, causing downturns of above average severity in the economies ofthe PIIGS countries (Portugal, Italy, Ireland, Greece and Spain), that are attributable to departures from

currency area criteria, including large differences in member country trade balances, limited labour

mobility and price flexibility.

The PIIGS

The economies of the PIIGS countries differed in several respects from those of the others. Unlike most

of the others, they had developed deficits on their balance of paymentscurrent accounts (largely

attributable to the effect of the euro's exchange rate upon the competitiveness of theirexports). Deleveraging of corporate and household debt had amplified the effects of the recession to a

greater extent - especially in those with larger-than-average financial sectors, and those that had

experienced debt-financed housing booms. In common with the others, they had developed cyclical

deficits under the action of their economies' automatic stabilisers and of their governments'

discretionary fiscal stimuli, and increases in existing structural deficits as a result of losses of revenue-

generating productive capacity. In some cases, their budget deficits had been further increased by

subventions and guarantees to distressed banks.

The PIIGS crisis (March 2010 to October 2011)

Overview

The Great Recession brought about large increases in the indebtedness of the eurozone governments

and by 2009, twelve member states had public debt/GDP ratios of over 60% of GDP. Concern developed

in early 2010 concerning the fiscal sustainability of the economies of the "PIIGS" countries

(Portugal, Ireland, Italy, Greece and Spain) and a eurozone fund was set up to assist members in

difficilty. Bond markets were eventually reassured by the conditional loans provided to Ireland, but

despite repeated loans to Greece, they demanded increasing risk premiums for lending to its

government. In late 2010 there were signs of contagion of market fears by the governments of othereurozone countries, and it appeared that that the integrity of the eurozone was being put in question.

The Irish problem


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Between 2009 and 2010 Ireland's budget deficit increased from 14.2 per cent to 32.4 per cent of GDP, as

a result mainly of one-off measures in support of the banking sector. November 2010 the government

applied for financial assistance from the EU and the IMF. By the Autumn of 2011 the government's

programmes of tax increases had brought about a major improvement in fiscal sustainability, bringing

down its budget deficit from 32.4 percent to an expected 10.6 percent of GDP.

The Greek crisis

In April 2010, the Greek government faced the prospect of being unable to fund its maturing debts. Its

problems arose from large increases in its sovereign spreads reflecting the bond market's fears that it

might default - fears that were based upon both its large budget deficits, and its limited economic

prospects. In May 2010, the Greek government was granted a 110 billion rescue package, financed

jointly by the eurozone governments and the IMF. Further increases in spreads showed that those

rescue packages had failed to reassure the markets.

Contagion among the PIIGS

Signs began to appear of the contagion of the bond market fears from Greece to other PIIGS countries,

particularly Portugal and Spain[20]. Portugal received an EU/IMF rescue package in May 2011, and

Greece was assigned a second package in July, neither of which restored the bond market's confidence

in eurozone sovereign debt. There was a dramatic increase in measures of the market assessment of

default risk, implying a 98 per cent probability of a Greek government default. Also in 2011, there was a

major decline in confidence in eurozone banks, following rumours that losses on Greek bonds had left

them undercapitalised. What had started as a Greek crisis was developing into a eurozone crisis because

the rescue packages that could be needed for the much bigger economies of Spain or Italy were

expected to be larger than the eurozone could afford. It was also acquiring the potential to trigger a

second international financial crisis because the default of a European government might be expected to

create a shock comparable to the failure of the Lehman Brothers bank that had triggered thecrash of

2008. The falls in world stock market prices that occurred in August and September of 2011 were widely

attributed to fears of a eurozone-generated financial crisis.

The Italian crisis

Bond market concern about the sustainability of Italy's public debt was reflected in a progressive rise in

the yield on its 10-year government bonds during 2011, and by October it had risen to over 5 percent.

The decisions of October 2011


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Overview

On the 26th of October, a meeting of eurozone leaders was held, the declared purpose of which was to

restore confidence by adopting a "comprehensive set of additional measures reflecting our strong

determination to do whatever is required to overcome the present difficulties". One set of measures

that was adopted for that purpose, acknowledged the Greek government's inability to repay its debt infull, and provided for the restructuring of that debt, and for the financial support necessary for the

government's survival. A second set was intended to provide an insurance against the contagion by

other eurozone countries of the Greek government's difficulties and to assure the markets that

sufficient eurozone funds would be available to cope with contagion should it occur. Thirdly, and in view

of the market's awareness that a rescue of the Italian government would impose a major drain on those

funds, the leaders sought to strengthen that government's defences against default. The measures that

were agreed are recorded in a communiqu and in a list of "main results".

Restructuring the Greek debt

The rescue package for Greece included a 50 percent write-off of the Greek government's debt (as had

been agreed with the Insitute of International Finance representing the world's banks), and a 130

billion conditional loan. The Greek government responded to the conditions for the loan by calling a

referendum to enable the Greek people to decide whether to accept the package[24]. At an emergency

summit on 2nd November, however, Greek Prime Minister Papandreou was persuaded by French

President Sarkozy and German Chancellor Merkel that the subject of the referendum should be whether

Greece should remain within the eurozone, rather than the acceptability of the rescue package. He was

also told that the 8 billion tranche of the EU/IMF loan that (needed to avoid a default in December)

would be withheld until after the referendum. Acknowledging the prospect that the referendum couldresult in the departure of Greece from the eurozone,Jean-Claude Juncker, the Chairman of

the Eurogroup of eurozone Finance Ministers announced that preparations for that outcome were in

hand. The next day Prime Minister Papandreou announced his willingness to cancel the referendum,

and that he had obtained agreement of opposition leaders to do so. On the 6th of November party

leaders agreed to form a coalition government under a new Prime Minister. A new government was

formed with Lucas Papademos as Prime Minister of Greece, and the terms of the EU rescue were

agreed.

Strengthening Italy's policies

A programme of reform proposed by the Italian Government was itemised in the summit communiqu,

and Prime Minister Berlusconi was called upon to submit "an ambitious timetable" for its

implementation. The reforms that were promised in response in his "letter of intent" are reported to

include also a reduction in the size of the civil service, a 15 billion privatisation of state assets and the

promotion of private sector investment in the infrastructure. It was approved on the 12th of November


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by the Italian parliament as the Financial Stability Law, and Berlusconi was replaced as Prime Minister by

the eminent economist, Mario Monti.

Strengthening the firewall

The "firewall measures" that were proposed in order to limit contagion by European governments and

their banks included a 4- to 5-fold increase in the size of the European Financial Stability Facility and

the recapitalisation of selected eurozone banks.

The eurozone crisis (November 2011 to present)

Overview

The bond market was not reassured by the decisions of October 2011. Despite the new Italiangovernment's acceptance of the measures had been agreed, the yields on its bonds rose to over 7 per

cent, and there was evidence of contagion of the crisis by other PIIGS and non-PIIGS countries, including

Austria and France, and even by Germany. As a result of the policy constraints affecting the European

Central Bank and the German Government, the further summit decisions of 8 December 2011 contained

nothing of immediate relevance to the crisis, and had no lasting effect upon the financial markets.

Greece

In early 2012 there were growing doubts about the ability of the Greek government to repay the holdersof the 14.4bn of debt that was due to mature in late March. It had been expected that it would be

getting a further 130bn tranche of EU/IMF funds before that date, but negotiations concerning the

terms of the loan had run into difficulties. The conditions attached to the loan by the EU/IMF team

included: (a) a further austerity drive, and (b) the conclusion of the private sector debt swap deal (

involving a 50% nominal reduction of Greeces sovereign bonds in private investors hands and up to

100 billion of debt forgiveness) that had been part of the decisions of 12th October. Concerning (a), the

leaders of France and Germany have told Greece that if it fails to implement the agreed economic

changes, it will not get the next tranche of the loan - and there are signs that Greece would not be able

to make the required changes. Concerning (b), a statement issued on 13th January by the Chairmen of

the negotiating committee reported that it "has not produced a constructive consolidated response byall parties, consistent with a voluntary exchange of Greek sovereign debt and the October 26/27

Agreement".

The larger PIIGS


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There was concern about the short-term fiscal stability of Italy and Spain in view of the large sums that

would be required to roll-over debts that are due to mature in 2012 - amounts that are much larger than

those needed to rescue Greece (approximately 300 billion for Italy and 150 billion for Spain). Market

concern arose from doubts about the willingness of the eurozone leaders to commit themselves to the

continuing support of Italy and Spain, and about their ability to raise the necessary funds. In December

2011, with sovereign bond yields at around 7 per cent for Italy and 6 per cent for Spain, it appeared

questionable whether those countries would be able to raise the funds required by further bond issues.

On 12th January, however, Spain and Italy sold about 22bn of government debt at sharply lower costs

than at previous auctions.

Contagion beyond the PIIGS

The decisions of October 2011 were followed in November by sharply rising sovereign spreads, on the

bond issues of Austria and France, and on 23 November, the German government failed to sell more

than two-thirds of its 10-year bonds at auction, after which its bond yields rose above the yields on US

treasuries and UK gilts. On 5th December the Standard & Poor's credit rating agency placed its long-term

sovereign ratings on 15 members of the eurozone on "CreditWatch review with negative implications",

and in January the Standard and Poor's credit rating agency, downgraded the bonds of 16 eurozone

governments, including those of France and Austria.

Policy responses

A European Union summit on 5-8 December proposed the adoption in March 2012 of a treaty change,

including a new fiscal compact, the effect of which if adopted, would be a major strenghtening of

the stability and growth pact. Its eventual adoption will depend upon the approval of the parliaments of

the member countries. No action was taken to resolve the immediate crisis - an omission that was

attributed to the attituces of the German authorities (see lower box), and to their policy constraints.

On 8 December, the European Central Bank offered to lend unlimited amounts to eurozone banks for a

period of three years at an interest rate of 1 per cent . It was suggested by President Sarkozy that "each

state can turn to its banks, which will have liquidity at their disposal". Although the banks in Greece,

Italy and Spain were reported to be in need of assistance , there were substantial reductions in

sovereign spreads in the course of the following month.

SOME IMOPORTANT BANKING TRMINOLOGY

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