mrunal [current] may-week1_p2_ economy- financial resolution authority, reena benerjee committee on...

6/16/2014 Mrunal [Current] May-Week1/P2: Economy- Financial resolution authority, Reena Benerjee Committee on Bancassurance, Minor Bank accounts, Enfo…

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[Current] May-Week1/P2: Economy- Financial resolution authority,Reena Benerjee Committee on Bancassurance, Minor Bank accounts,Enforcement day

1. Prologue

2. Banking rights for Bachchaa Party

1. Pro arguments

2. Anti-Argument

3. Bancassurance: Reena Benerjee Committee

4. Deposit Insurance and Credit Guarantee Corporation (DICGC)

1. Function1: Deposit insurance

2. Function2: Credit guarantee

3. FRA (Financial Resolution Authority)

4. Difference: FRA vs FRA

5. What is Financial Stability and Development Council (FSDC)?

6. Enforcement Directorate

1. ED: Functions

2. ED: Future reforms

7. Hindi translation of technical terms

8. CSAT mock questions

9. Answers to Mock CSAT questions

Prologue

Those inquiring about Hindu science tech compilation, yes they’ll come but not in anext few weeks. Present schedule is

Remaining of June: [Current] series + Toppers’ interviewsMost of the July will be spent in doing Budget + Summaries of Economysurvey. (Survey alone is a project worth ~20 days headache).After that Hindu science tech’s number will come. That’s probably July end orAugust beginning.

anyways, Continuing from where we had left. Current Affairs May week1 (1-7)

1. History, Culture, Polity (coming soon)2. Economy (you’re here)3. Diplomacy (done click me)

Questions

I. CSAT MCQ given at bottom of this article

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II. Mains exama. (GS2) Write note on the Financial Stability and Development Council

(FSDC): 100 words.b. (GS2) Write a note on the organization and functions of Enforcement

directorate. Suggest measures for improvement of this body. 200 wordsc. (GS3) What is Enforcement Directorate? How does it help combating

terror finance and money laundering? 200 words.III. Interview

a. Are you in favor of RBI’s latest move of allowing Children to open bankaccounts without adult supervision? Yes / No / why?

b. Why is RBI and IRDA having disagreement over Bancassurance model?Which model is better for financial inclusion in India?

c. Recently, some Committee suggested setting up a “Financial ResolutionAuthority”? What will it do? Who will benefit from this?

Banking rights for Bachchaa Party

System, until now:

Children below 18 are “minor”Minor cannot have separate accountThey can open joint account with adults. Father natural guardian. Later RBIalso authorized mothers. (But doesn’t apply to Muslim minors)If guardian dies, minor will get money from account only after attainingmajority. (Bollywood movies exploit this premise by introducing an eviluncle).Minor should be literateTwo minors cannot open joint accountMinors can sign cheque.

RBI reform May 2014

All minors can open bank accounts via parents/ legal guardian.BUT Minors above 10 years can open bank account without adult supervisionAND they can open only three type of Bank accounts:

1. savings account2. fixed deposit account3. recurring deposit account.

In other words, they cannot open Current account, meant for businessmen.Can get ATM card, cheque books, netbanking facilities

Safeguards for minor accounts

Bank cannot charge penalty if minimum balance not maintained. (this appliesto all minor and major accounts, after 1st April 2014.)But bank should ensure that such accounts remain in credit. Meaning childrenshould not be allowed to totally empty his balance.



Bank can put restriction of money withdrawal e.g. not more than 500 in 24hours.Bank can decide minimum documents.

Now let’s see pro and anti-arguments for group discussion / interview:

Pro arguments

This will bring uniformity in the bankaccounts. Some banks already offeringseparate minor accounts e.g. Kotak Mahindra’s My Junior account.

Financial awareness, financial literacy: children learn about savings habit andbanking system.Financial discipline: They understand the value of money and differencebetween “needs” vs “wants”.Financial inclusion: e.g. child-laborers in tea-stalls can save money.Government directly sends scholarship money to such account.Social change: many urban teenagers have broken family they’re pretty muchliving on their own.

Anti-Argument

Children more Gullible, and likely to be victims of identity theft, hacking,phishing.They can become victim of miselling by private banks via Bancassurance,mutual funds and hidden charges on credit card.Therefore, RBI shouldn’t have allowed the children to open accounts withoutadult supervision.

Bancassurance: Reena Benerjee Committee

First understand the meaning of Bancassurance, and difference between Agentmodel vs Broker model from earlier article click me.

Agent model Bank ties up with only 1 life + 1 non-life insurance company

Broker model Bank is free to sell products of multiple insurance companies.

As such broker model good, because customer gets choice, less chances of mis-selling. Hence IRDA and Finance ministry wanted Sarkaari banks to move fromAgent model to Broker model. But there is loophole. Consider following example:

Agent model Broker model

SBI bank ties up with SBI life insurance.SBI ties up with LIC, orient lifeinsurance, SBI insurance andmany other companies.

Bank staff only ordered to sell SBI lifeinsurance to all bank customers. Chances ofmis-selling high because performance bonusdepend on ‘sales-target’.

Still SBI Bank officers can forcestaff to promote only SBIinsurance products=> mis-selling chances high.

https://www.kotak.com/kotaknri/JuniorAccount/index.html?pdt=406&Banner=Juniorredbanner&Inventory=Productpagetop

http://mrunal.org/2014/01/banking-bancassurance-compulsory-broker-model-irda-vs-banks-issue-benefits-challanges-insurance-penetration-financial-inclusion-nachiket-committee.html#171



To prevent this abuse, IRDA gave two guidelines:

1. 25% sales cap to Promoter Company’s insurance company. Meaning, if SBIbank staff sells 100 crore worth policies, then only 25 cr. Worth policiesshould have been sold from SBI insurance. Other 75 cr. Worth policies fromLIC, Orient life insurance etc.

2. Bank should hire separate staff for insurance business. (to prevent mis-sellingby banking staff, under the threat of performance bonus.)

Rajan didn’t like it.

NOT one bit.

Rajan feels IRDA Chairman TS Vijayan should not give orders to banks abouthow to conduct their business, this is RBI’s turf.War of words and indirect taunting during seminar / memorial lecturesstarted.Finally, April 2014, finance ministry setup Reena Benerjee Committee to sortthe mess. (Ms. Reena = General Manager in RBI)

Committee’s interim report suggested following:

Gradual sales cap

1st year 75%

2nd year 60%

3rd 50%

4th 35%

5th year end 25%

Committee doesn’t want separate recruitment of insurance staff within bank.Because it’ll raise cost of operation.Then to maintain the same profit margin, banks will start charging more feeson ATM, Credit card etc. They may also reduce the interest paid on savings orfixed deposit. Ultimately customer will suffer.Banks should not be forced to adopt Broker model. Decision should be left tothe board of directors of the given bank. No single model is good for everybusiness setup.RBI doesn’t allow stock brokers to run banking operations, then why shouldIRDA force Bankers to become brokers? It’s illogical.

in other words, Reena Benerjee committee has endorsed Rajan’s side. IRDAChairman seems to have lost this round of territorial domination.

Some factoids /side notes

Insurance density = ratio of premium to population (per capita)For India insurance density =$9, China 50+. Therefore India has lessinsurance penetration than China.



55,000+ bank branches of Public sector banks, have not sold any insurancepolicy. Therefore we cannot hope that broker model bancassurance willautomatically fix the problem of low insurance density.Public awareness also necessary for improving insurance penetration.It’ll be better if IRDA+RBI worked together rather than making it a questionof ego/territorial supremacy.

Deposit Insurance and Credit Guarantee Corporation(DICGC)

Current topic is “Financial Resolution Authority” but before going into this topic,we’ve to understand what is DICGC.

HQ: Mumbai.DICGC is a corporation setup by act of parliament. (means it is not a companyregistered under companies act).RBI completely owns DICGC.RBI has four dy. Governors. One of them functions as the chairman ofDICGC.

Ownership

Chronology Organization Ownership

1978 DICGC 100% RBI

Act of 1981 (setupin 1982)

EXIM bank 100% Government

July 1982 NABARD Govt.99.3% + RBI 0.7%

1988Nationalhousing Bank

100% RBI

1990 SIDBISarkaari banks and financial institutionslike SBI, LIC, IDBI

Mind it: we’ve only four All India financial institutions (AIFI) viz. EXIM,NABARD, NHB and SIDBI.Anyways, back to Deposit Insurance and Credit Guarantee Corporation (DICGC).From the name, we can see it has two functions

1. Deposit insurance

2. Credit guarantee

Function1: Deposit insurance

You buy car insurance, so you’re protected against theft or accident of yourcar.But what about insurance of the money you’ve deposited in the bank account?Yes, banks have to keep aside some money as ‘backup’, in CRR and SLR.But still what if there is a massive crisis, nobody repays a single paisa of loan.Bank has to completely shut down its operation? (situation similar to



American Subprime crisis)What if bank itself involved in a massive fraud and RBI cancels its license.In such cases, what is the guarantee that you’ll get back money from yoursavings/current/fixed deposit account?To protect the bank customers in such scenario, government had enactedDeposit insurance Act in the 60s.Under this act, every bank has to compulsorily take insurance from DICGC.(Just under Motor Vehicle act, it is compulsory to get car insurance.)Every bank means every commercial bank (public, private, foreign bank),cooperative bank and regional rural bank (RRB).So, when bank fails / shuts down- DICGC will give money to depositors(maximum 1 lakh per depositor).Of course, money doesn’t fall from sky, if you get health insurance thenyou’ve to pay premium right?Same way, Bank itself has to pay the premium to DICGC. (They cannot deductthis charge from your bank account or interest.) only then DICGC can cometo rescue during crisis.RBI can inspect the banks on DICGC’s behalf to make sure they’ve takenadequate precautions in running the bank.

First function is clear. Now the second function.

Function2: Credit guarantee

What if bank has given loan to a farmer but he cannot repay it because of thebad monsoon? And government also doesn’t come up with some debt waiverscheme?Then banks will not give loans to farmers next time. Agriculture productionwill decline.Therefore, DICGS also gives ‘guarantee’ to bank, So, if farmer doesn’t repayhis loan, we’ll pay you (Bank) the loan money….This is credit guarantee, onetype of insurance.In 2014, Bharatiya Mahila bank announced they’ll give loans upto Rs.1 croreto female entrepreneurs, without any collateral.Suppose, a lady businessman cannot repay the loan, then what will Mahila bankdo? They cannot even attach her property (because loan given withoutcollateral)!But Mahila bank doesn’t need to worry because they’re given ‘creditguarantee’ by Credit Guarantee Fund Trust for Micro and Small enterprises(CGTMSE) fund is under MSME ministry. (and not this DICGC)

Anyways, DICGC is an old topic. Why in news?

Because a Committee recommended converting this body into a new body called…

FRA (Financial Resolution Authority)

Financial Stability and Development Council (FSDC) => they setup a panelunder Anand Sinha (RBI Dy.Governor) + Arvind Mayaram (Finance Secretary



).This Sinha-Mayaram panel recommended creating Financial ResolutionAuthority FRA.

Functions:

1. Solve crisis in all financial institutions. Not just banking, but non-bankingfinancial institutions also e.g. Muthoot Gold Loans, Reliance Mutual funds.

2. FRA will protect all depositors (in banks) and all investors (in non-bankingfunction financial institutions)

3. FRA will subsume the above Deposit Insurance and Credit GuaranteeCorporation (DICGC)

4. WE need to create FRA, because all financial markets are interconnected. Acrisis in banking sector, can have negative fallout even on share market (andthereby mutual funds), and vice versa.

5. This FRA will be independent of govt. and financial regulators (such as RBI,SEBI, IRDA)

6. FRA can prevent bank failure, and reduce damage to economy7. Apart from “insurance premium”, FRA can also arrange money by issuing

bonds (And that bond-money can be used for resucing the failedbank/institution.

Difference: FRA vs FRA

FRA FRA

Financial redressal agency Financial resolution authority

BN Srikrishna (FSLRC under Finmin) andNahicket Mor Committee (RBI)recommended this.

Sinha-Mayaram panel under FSDCrecommended this.

For consumer protection in financialproducts/services in banking, insurance,sharemarket etc.

For preventing collapse of financialinstitutions -both banking and non-banking.

By the way

What is Financial Stability and Development Council(FSDC)?

Structure

Secretariat office in Economic affairs department under Finmin.Chairman : Finance minister himselfMembers:

1. Financial sector regulators viz. RBI, SEBI, IRDA, PFRDA and FMC.(FMC is latest member. Included in December 2013)

2. Secretaries from finance ministry3. Chief Economic Advisor in finance ministry.

Functions



Setup in 2010For coordination among regulatory bodies in financial sector. But it cannotoverride the decision taken by an independent regulator (SEBI, RBI) etc. intheir own territory.This body is only for coordination, consultation via meetings. (Desi liquor anditem songs options)It has a sub-committee chaired by RBI governor. This is the ‘first stop’ fordispute resolution among regulators.Coordinates with international bodiesPromotes financial literacy and financial inclusion.Macro prudential supervision

~120 words.

Enforcement Directorate

This organization is important for GS2 (ministries & department) + GS3(money laundering)Why in news? Because 1st May 2014 was Enforcement day and Presidentgave speech. Structure and Functions of ED.ED functions under Revenue department of Finance ministry.ED Gets officers from custom and excise, Income tax department and variouspolice agencies.HQ: Delhi. Offices spread across India

ED: Functions

ED enforces two acts

FEMA 1999 PMLA 2002

Civil law Criminal law

Foreign Exchange ManagementAct. Two basic premises

Only RBI authorized dealerscan buy/sell foreigncurrencyQuantitative restrictions onhow many dollars etc.foreign currency you canbring/takeout from India.(RBI decides this)

Prevention of money laundering Act.

ED can impose penalty: 3x timethe money involved. Meaning EDitself has quasi-judicial powershere (i.e. giving punishment like acourt)

ED can only investigate, arrest the suspects,attach their assets. Court will decidepunishment, and all such assets will be allotedto government.

In Dec 2013, ED raided



owner of buysellbit.co.inlocated in A’bad (MahimGupta)Because RBI has not yetlegalized Bitcoins, yet thisgentleman was sellingbitcoins to people inexchange of rupees. So in away he was acting as “Forexagent” without license fromRBI!

In 2014 alone, ED attached assets worth1000+ crores.+ ED also investigating people who hadgiven money to that A’bad gentlemanMahim Gupta for buying bitcoins.Because bitcoins are anonymous, can beused for terror financing and moneylaundering. hence ED got powers toinvestigate under PMLA.

ED: Future reforms

(I’ve copied following points from President’s speech and you can directlycut-paste them on any question related to “reform/measures taken” to combatmoney laundering/terror financing)

Today, money laundering is a global phenomenon. Black money (in Rupee) isconverted into dollars, then invested in foreign banks/real estate/ coal mines(like Madhu Koda did).Therefore international cooperation needed to curb cross-border moneylaundering and terror financingWe already have joined Financial Action Task Force (FATF). HQ: Paris, whichact against international money laundering.We’ve also joined similar bodies in Europe and Asia viz. Eurasian Group onCombating Money Laundering and Financing of Terrorism (EAG), and theAsia Pacific Group on Money Laundering (APG)2002: we enacted Prevention of Money Laundering Act (PMLA),2002. Itsparallel with recommendations of FATFED should utilize the multilateral cooperation from FATF, EAG and APG.ED should adopt cutting edge technology for cyber forensic, communicationand information infrastructureGovernment should provide ED with more funds, technology, man-powerparticularly legal experts

Hindi translations of technical terms

Civil law द�वानी काननू

Credit Guarantee ऋण अदायगी गारटं�

Criminal law फौजदार� काननू

Deposit Insurance and Credit GuaranteeCorporation

�न�पे बीमा और ��यय गारटं��नगम

Enforcement directorate �वत�न �नदशेालय

Financial redressal agency �व�तीय �शकायत �नवारण एज�सी

financial resolution authority �व�तीय सकं�प �ा�धकार

Financial Stability and DevelopmentCouncil

�व�तीय ि�थरता और �वकासप�रषद


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Foreign exchange �वदशेी �व�नमय

Minor account नाबा�लग खाता

Money laundering धनशोधन

multilateral cooperation बहपु�ीय सहयोग

PMLA धनशोधन रोक अ�ध�नयम

Terror Financing आतकंवाद �व�तपोषण

Bitcoinअभी इसका �या �हदं� हो सकता ह?ैहाहाहा

CSAT mock questions

Q1. (UPSC 2007) The national housing bank (NHB) was setup in India as awholly owned subsidiary of which of the following bank?

a. State bank of Indiab. Reserve Bank of Indiac. ICICId. LIC

Q2. (UPSC 2004) Find Correct Statement(s)

a. NHB, the apex institution of housing finance in India, was setup as a whollyowned subsidiary of RBI

b. Small industries development bank of India was established as a wholly ownedsubsidiary of the Industrial development bank of India

c. Both A and Bd. Neither A nor B

Q3. Which of the following are fully owned by RBI?

a. NHB, EXIM, NABARD, DICGCb. NABARD, EXIM, SIDBIc. NHB, SIDBI and NABARDd. NHB, DICGC

Q4. Correct Chronology (From old to young)

a. NABARD, SIDBI, NHB , EXIMb. EXIM, NHB, NABARD, SIDBIc. EXIM, SIDBI, NHB, NABARDd. EXIM, NABARD, NHB , SIDBI

Q5. Which of the following are legally required to get insurance on customerdeposits?

a. Newly licensed banks of Bandhan and IDFCb. Cooperative banks and regional rural banks.c. Foreign banks and private sector commercial banksd. Merchant Banks



Answer choices

a. only 1 and 3b. only 1, 2 and 4c. only 1, 3 and 4d. only 1, 2 and 3

Q6. as per the latest guidelines of RBI for minor persons

a. Minors can open new bank accounts only with mother as first guardian, and inher death/separation father as guardian.

b. Minors are permitted to open all type of bank accounts that an adult personcan open.

c. Both A and Bd. Neither A nor B.

Q7. Find correct statement:

a. Insurance density is defined as the ratio of number of insurance policyholders per 1000 persons

b. Insurance density is defined as the ratio of number of insurance policyholders per square km of habitable area of a country.

c. Insurance density is defined as the ratio of premium to population.d. Insurance density is defined as the ratio of population to premium.

Q8. find correct statement about Deposit Insurance and Credit GuaranteeCorporation (DICGC)

a. DICGC protects all the depositors of a bank, except current account holders.b. DICGC protects the bank against default by female entrepreneurs without

collateral.c. DICGC protects the bank against default by exportersd. None of above.

Q9. What will be the functions of the proposed financial resolutionauthority?

a. Consumer grievance redressal in financial marketb. Dispute resolution and coordination among various financial regulatorsc. Macro prudential supervision over primary and secondary market under the

capital market.d. Rescuing the depositors and investors in all financial institutions during a

crisis.

Q10. Correct statements regarding Foreign Exchange Management Act and

Prevention of money laundering Act.

a. ED enforces PMLA while RBI enforces FEMAb. Under PMLA, ED enjoys quasi-judicial powers to impose direct penalty on



the hawala operators.c. Both FEMA and PMLA are criminal laws

Answer choices

a. Only 1 and 2b. Only 2 and 3c. Only 1 and 3d. None of them

Q11. If a person opens an online portal to facilitate the buying/sellingbitcoins in lieu of rupees, he is can be investigated under

a. Foreign Exchange Management Act.b. Prevention of money laundering Act.c. Both A and B.d. Neither A nor B because there is no legal framework in India to deal with

Bitcoin, yet.

Q12. Consider following statements about Financial Stability andDevelopment Council (FSDC)

1. Its Chairman is Finance minister and Vice chairman is RBI governor.2. It is the supreme body of Indian financial sector regulators which can give a

binding order to sort out territorial disputes between any two regulators.3. It aims to promote financial literacy and financial inclusion.

Answer choices

a. only 1b. only 3c. all of themd. None of them

Mains and interview

I. Mains exama. (GS2) Write note on the Financial Stability and Development Council

(FSDC): 100 words.b. (GS2) Write a note on the organization and functions of Enforcement

directorate. Suggest measures for improvement of this body. 200 wordsc. (GS3) What is Enforcement Directorate? How does it help combating

terror finance and money laundering? 200 words.II. Interview

a. Are you in favor of RBI’s latest move of allowing Children to open bankaccounts without adult supervision? Yes / No / why?

b. Why is RBI and IRDA having disagreement over Bancassurance model?Which model is better for financial inclusion in India?

c. Recently, some Committee suggested setting up a “Financial ResolutionAuthority”? What will it do? Who will benefit from this?



Answers to Mock CSAT questions

1. RBI totally 0wns NHB hence answer a2. Only first statement correct hence answer 1a3. Only NHB and DICGC fully owned by RBI hence answer d4. Answer d5. Merchant bank is not a ‘bank’ under banking regulation act. It is an NBFC

registered to SEBI, looking after IPO-underwriting etc. Therefore, it doesn’tfall under Deposit insurance act. Answer d:only 1,2 and 3.

6. Minor can open without guardian, so A wrong. They cannot open currentaccount unlike an adult, so B wrong. Hence answer D

7. Answer Premium to population8. Answer D. none is right. DICGC protects all type of bank accounts. DICGC

protects banks against farm-loan defaults. But DICGC doesn’t protect bank again female entrepreneur default or exporter default. There are separatebodies to look after them: CGTMSE and ECGC respectively.

9. Answer is D.10. None of them answer D.11. Option C, he’ll be investigated under both. recall Mahim Gupta case.12. Option B, only 3 is correct.

Visit Mrunal.org/CURRENT for entire Archive weekly current affairs compilationspublished so far.

URL to article: http://mrunal.org/2014/06/current-may-week1p2-economy-financial-resolution-authority-reena-benerjee-committee-bancassurance-minor-bank-accounts-enforcement-day.html

Posted By Mrunal On 16/06/2014 @ 01:53 In the category Current Affairs Weekly

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