[current] may-week1_p3_ economy- financial resolution authority, reena benerjee committee on...

6/30/2014 [Current] May-Week1/P3: Economy- Financial resolution authority, Reena Benerjee Committee on Bancassurance, Minor Bank accounts, Enforcement day

http://mrunal.org/2014/06/current-may-week1p2-economy-financial-resolution-authority-reena-benerjee-committee-bancassurance-minor-bank-accounts-enforc 1/16

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 theyll come but not in a next few weeks.

Present schedule is

Remaining of June: [Current] series + Toppers interviews

Most of the July will be spent in doing Budget + Summaries of Economy survey. (Survey alone is a

project worth ~20 days headache).

After that Hindu science techs number will come. Thats probably July end or August beginning.

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

1. History, Culture, Polity (coming soon)

2. Economy (youre here)

3. Diplomacy (done click me)

Questions

1. CSAT MCQ given at bottom of this article



2. Mains exam

1. (GS2) Write note on the Financial Stability and Development Council (FSDC): 100 words.

2. (GS2) Write a note on the organization and functions of Enforcement directorate. Suggest

measures for improvement of this body. 200 words

3. (GS3) What is Enforcement Directorate? How does it help combating terror finance and money

laundering? 200 words.

3. Interview

1. Are you in favor of RBIs latest move of allowing Children to open bank accounts without adult

supervision? Yes / No / why?

2. Why is RBI and IRDA having disagreement over Bancassurance model? Which model is better

for financial inclusion in India?

3. Recently, some Committee suggested setting up a Financial Resolution Authority? What will it

do? Who will benefit from this?

Banking rights for BachchaaParty

System, until now:

Children below 18 are minor

Minor cannot have separate account

They can open joint account with adults. Father natural guardian. Later RBI also authorized mothers.

(But doesnt apply to Muslim minors)

If guardian dies, minor will get money from account only after attaining majority. (Bollywood movies

exploit this premise by introducing an evil uncle).

Minor should be literate

Two minors cannot open joint account

Minors 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 supervision

AND they can open only three type of Bank accounts:

1. savings account

2. fixed deposit account

3. 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 applies to all minor and major

accounts, after 1st April 2014.)

But bank should ensure that such accounts remain in credit. Meaning children should not be allowed

to totally empty his balance.

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

Bank can decide minimum documents.

Now lets see pro and anti-arguments for group discussion / interview:

Pro arguments

This will bring uniformity in the bankaccounts. Some banks already offering separate minor

accounts e.g. Kotak Mahindras My Junior account.

Financial awareness, financial literacy: children learn about savings habit and banking system.

Financial discipline: They understand the value of money and difference between 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 theyre pretty much living 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 shouldnt have allowed the children to open accounts without adult supervision.

Bancassurance: Reena Benerjee Committee

First understand the meaning of Bancassurance, and difference between Agent model 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 from Agent 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 life insurance, SBI

insurance and many

other companies.

Bank staff only ordered to sell SBI

life insurance to all bank customers.

Chances of mis-selling high

because performance bonus

depend on sales-target.

Still SBI Bank officers

can force staff to

promote only SBI

insurance products=>

mis-selling chances

high.

To prevent this abuse, IRDA gave two guidelines:

1. 25% sales cap to Promoter Companys insurance company. Meaning, if SBI bank staff sells 100

crore worth policies, then only 25 cr. Worth policies should have been sold from SBI insurance.

Other 75 cr. Worth policies from LIC, Orient life insurance etc.

2. Bank should hire separate staff for insurance business. (to prevent mis-selling by banking staff,

under the threat of performance bonus.)

Rajan didnt like it.

NOT one bit.

Rajan feels IRDA Chairman TS Vijayan should not give orders to banks about how to conduct their

business, this is RBIs turf.

War of words and indirect taunting during seminar / memorial lectures started.

Finally, April 2014, finance ministry setup Reena Benerjee Committee to sort the mess. (Ms. Reena



= General Manager in RBI)

Committees interim report suggested following:

Gradual sales cap

1st year 75%

2nd year 60%

3rd 50%

4th 35%

5th year end 25%

Committee doesnt want separate recruitment of insurance staff within bank. Because itll raise cost

of operation.

Then to maintain the same profit margin, banks will start charging more fees on ATM, Credit card

etc. They may also reduce the interest paid on savings or fixed deposit. Ultimately customer will

suffer.

Banks should not be forced to adopt Broker model. Decision should be left to the board of directors

of the given bank. No single model is good for every business setup.

RBI doesnt allow stock brokers to run banking operations, then why should IRDA force Bankers to

become brokers? Its illogical.

in other words, Reena Benerjee committee has endorsed Rajans side. IRDA Chairman 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 less insurance penetration than

China.

55,000+ bank branches of Public sector banks, have not sold any insurance policy. Therefore we

cannot hope that broker model bancassurance will automatically fix the problem of low insurance

density.

Public awareness also necessary for improving insurance penetration.

Itll be better if IRDA+RBI worked together rather than making it a question of ego/territorial

supremacy.



Deposit Insurance and Credit Guarantee

Corporation (DICGC)

Current topic is Financial Resolution Authority but before going into this topic, weve to understand what

is DICGC.

HQ: Mumbai.

DICGC is a corporation setup by act of parliament. (means it is not a company registered under

companies act).

RBI completely owns DICGC.

RBI has four dy. Governors. One of them functions as the chairman of DICGC.

Ownership

Chronology Organization Ownership

1978 DICGC 100% RBI

Act of 1981

(setup in

1982)

EXIM bank 100% Government

July 1982 NABARD Govt.99.3% + RBI 0.7%

1988National

housing Bank100% RBI

1990 SIDBISarkaari banks and financial

institutions like SBI, LIC, IDBI

Mind it: weve 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 youre protected against theft or accident of your car.

But what about insurance of the money youve 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 youll get back money from your savings/current/fixed

deposit account?

To protect the bank customers in such scenario, government had enacted Deposit 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 doesnt fall from sky, if you get health insurance then youve to pay premium

right?

Same way, Bank itself has to pay the premium to DICGC. (They cannot deduct this charge from

your bank account or interest.) only then DICGC can come to rescue during crisis.

RBI can inspect the banks on DICGCs behalf to make sure theyve taken adequate 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 the bad monsoon? And

government also doesnt come up with some debt waiver scheme?

Then banks will not give loans to farmers next time. Agriculture production will decline.

Therefore, DICGS also gives guarantee to bank, So, if farmer doesnt repay his loan, well pay you

(Bank) the loan money.This is credit guarantee, one type of insurance.

In 2014, Bharatiya Mahila bank announced theyll give loans upto Rs.1 crore to female

entrepreneurs, without any collateral.

Suppose, a lady businessman cannot repay the loan, then what will Mahila bank do? They cannot

even attach her property (because loan given without collateral)!

But Mahila bank doesnt need to worry because theyre given credit guarantee 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 panel under Anand Sinha (RBI

Dy.Governor) + Arvind Mayaram (Finance Secretary ).

This Sinha-Mayaram panel recommended creating Financial Resolution Authority FRA.

Functions:

1. Solve crisis in all financial institutions. Not just banking, but non-banking financial institutions also

e.g. Muthoot Gold Loans, Reliance Mutual funds.

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

institutions)

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

4. WE need to create FRA, because all financial markets are interconnected. A crisis in banking

sector, can have negative fallout even on share market (and thereby 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 economy

7. Apart from insurance premium, FRA can also arrange money by issuing bonds (And that bond-

money can be used for resucing the failed bank/institution.

Difference: FRA vs FRA

FRA FRA

Financial redressal agencyFinancial resolution

authority

BN Srikrishna (FSLRC under

Finmin) and Nahicket Mor

Committee (RBI) recommended

this.

Sinha-Mayaram panel

under FSDC

recommended this.

For consumer protection in



financial products/services in

banking, insurance, sharemarket

etc.

For preventing collapse of

financial institutions -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 himself

Members:

1. Financial sector regulators viz. RBI, SEBI, IRDA, PFRDA and FMC. (FMC is latest member.

Included in December 2013)

2. Secretaries from finance ministry

3. Chief Economic Advisor in finance ministry.

Functions

Setup in 2010

For coordination among regulatory bodies in financial sector. But it cannot override the decision

taken by an independent regulator (SEBI, RBI) etc. in their own territory.

This body is only for coordination, consultation via meetings. (Desi liquor and item songs options)

It has a sub-committee chaired by RBI governor. This is the first stop for dispute resolution among

regulators.

Coordinates with international bodies

Promotes 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 President gave speech. Structure


http://mrunal.org/2014/06/current-may-week1p2-economy-financial-resolution-authority-reena-benerjee-committee-bancassurance-minor-bank-accounts-enfor 10/16

and Functions of ED.

ED functions under Revenue department of Finance ministry.

ED Gets officers from custom and excise, Income tax department and various police agencies.

HQ: Delhi. Offices spread across India

ED: Functions

ED enforces two acts

FEMA 1999 PMLA 2002

Civil law Criminal law

Foreign Exchange

Management Act. Two

basic premises

Only RBI authorized

dealers can buy/sell

foreign currency

Quantitative

restrictions on how

many dollars etc.

foreign currency you

can bring/takeout

from India. (RBI

decides this)

Prevention of money laundering

Act.

ED can impose penalty:

3x time the money

involved. Meaning ED

itself has quasi-judicial

powers here (i.e. giving

punishment like a court)

ED can only investigate, arrest the

suspects, attach their assets. Court

will decide punishment, and all

such assets will be alloted to

government.

In Dec 2013, ED

raided owner of

buysellbit.co.in

located in Abad

(Mahim Gupta)

In 2014 alone, ED attached

assets worth 1000+ crores.

+ ED also investigating people



Because RBI has not

yet legalized

Bitcoins, yet this

gentleman was

selling bitcoins to

people in exchange

of rupees. So in a

way he was acting as

Forex agent without

license from RBI!

who had given money to that

Abad gentleman Mahim

Gupta for buying bitcoins.

Because bitcoins are

anonymous, can be used for

terror financing and money

laundering. hence ED got

powers to investigate under

PMLA.

ED: Future reforms

(Ive copied following points from Presidents speech and you can directly cut-paste them on any

question related to reform/measures taken to combat money laundering/terror financing)

Today, money laundering is a global phenomenon. Black money (in Rupee) is converted into dollars,

then invested in foreign banks/real estate/ coal mines (like Madhu Koda did).

Therefore international cooperation needed to curb cross-border money laundering and terror

financing

We already have joined Financial Action Task Force (FATF). HQ: Paris, which act against

international money laundering.

Weve also joined similar bodies in Europe and Asia viz. Eurasian Group on Combating Money

Laundering and Financing of Terrorism (EAG), and the Asia Pacific Group on Money Laundering

(APG)

2002: we enacted Prevention of Money Laundering Act (PMLA),2002. Its parallel with

recommendations of FATF

ED should utilize the multilateral cooperation from FATF, EAG and APG.

ED should adopt cutting edge technology for cyber forensic, communication and information

infrastructure

Government should provide ED with more funds, technology, man-power particularly legal experts

Hindi translations of technical terms

Civil law

Credit Guarantee



Criminal law

Deposit Insurance and Credit

Guarantee Corporation

Enforcement directorate

Financial redressal agency

financial resolution authority

Financial Stability and Development

Council

Foreign exchange

Minor account

Money laundering

multilateral cooperation

PMLA

Terror Financing

Bitcoin

?

CSAT mock questions

Q1. (UPSC 2007) The national housing bank (NHB) was setup in India as a wholly owned subsidiary of

which of the following bank?

1. State bank of India

2. Reserve Bank of India

3. ICICI

4. LIC

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

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

2. Small industries development bank of India was established as a wholly owned subsidiary of the



Industrial development bank of India

3. Both A and B

4. Neither A nor B

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

1. NHB, EXIM, NABARD, DICGC

2. NABARD, EXIM, SIDBI

3. NHB, SIDBI and NABARD

4. NHB, DICGC

Q4. Correct Chronology (From old to young)

1. NABARD, SIDBI, NHB , EXIM

2. EXIM, NHB, NABARD, SIDBI

3. EXIM, SIDBI, NHB, NABARD

4. EXIM, NABARD, NHB , SIDBI

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

1. Newly licensed banks of Bandhan and IDFC

2. Cooperative banks and regional rural banks.

3. Foreign banks and private sector commercial banks

4. Merchant Banks

Answer choices

1. only 1 and 3

2. only 1, 2 and 4

3. only 1, 3 and 4

4. only 1, 2 and 3

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

1. Minors can open new bank accounts only with mother as first guardian, and in her death/separation

father as guardian.

2. Minors are permitted to open all type of bank accounts that an adult person can open.

3. Both A and B

4. Neither A nor B.

Q7. Find correct statement:



1. Insurance density is defined as the ratio of number of insurance policy holders per 1000 persons

2. Insurance density is defined as the ratio of number of insurance policy holders per square km of

habitable area of a country.

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

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

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

1. DICGC protects all the depositors of a bank, except current account holders.

2. DICGC protects the bank against default by female entrepreneurs without collateral.

3. DICGC protects the bank against default by exporters

4. None of above.

Q9. What will be the functions of the proposed financial resolution authority?

1. Consumer grievance redressal in financial market

2. Dispute resolution and coordination among various financial regulators

3. Macro prudential supervision over primary and secondary market under the capital market.

4. 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.

1. ED enforces PMLA while RBI enforces FEMA

2. Under PMLA, ED enjoys quasi-judicial powers to impose direct penalty on the hawala operators.

3. Both FEMA and PMLA are criminal laws

Answer choices

1. Only 1 and 2

2. Only 2 and 3

3. Only 1 and 3

4. None of them

Q11. If a person opens an online portal to facilitate the buying/selling bitcoins in lieu of rupees, he is can

be investigated under

1. Foreign Exchange Management Act.

2. Prevention of money laundering Act.

3. Both A and B.

4. Neither A nor B because there is no legal framework in India to deal with Bitcoin, yet.



Q12. Consider following statements about Financial Stability and Development 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

1. only 1

2. only 3

3. all of them

4. None of them

Mains and interview

1. Mains exam

1. (GS2) Write note on the Financial Stability and Development Council (FSDC): 100 words.

2. (GS2) Write a note on the organization and functions of Enforcement directorate. Suggest

measures for improvement of this body. 200 words

3. (GS3) What is Enforcement Directorate? How does it help combating terror finance and money

laundering? 200 words.

2. Interview

1. Are you in favor of RBIs latest move of allowing Children to open bank accounts without adult

supervision? Yes / No / why?

2. Why is RBI and IRDA having disagreement over Bancassurance model? Which model is better

for financial inclusion in India?

3. Recently, some Committee suggested setting up a Financial Resolution Authority? What will it

do? Who will benefit from this?

Answers to Mock CSAT questions

1. RBI totally 0wns NHB hence answer a

2. Only first statement correct hence answer 1a

3. Only NHB and DICGC fully owned by RBI hence answer d

4. Answer d

5. Merchant bank is not a bank under banking regulation act. It is an NBFC registered to SEBI, looking

after IPO-underwriting etc. Therefore, it doesnt fall under Deposit insurance act. Answer d:only 1,2

and 3.



6. Minor can open without guardian, so A wrong. They cannot open current account unlike an adult, so

B wrong. Hence answer D

7. Answer Premium to population

8. Answer D. none is right. DICGC protects all type of bank accounts. DICGC protects banks against

farm-loan defaults. But DICGC doesnt protect bank again female entrepreneur default or exporter

default. There are separate bodies to look after them: CGTMSE and ECGC respectively.

9. Answer is D.

10. None of them answer D.

11. Option C, hell be investigated under both. recall Mahim Gupta case.

12. Option B, only 3 is correct.

[current] may-week1_p3_ economy- financial resolution authority, reena benerjee committee on...

Documents

open bank accounts

financial stability

minor bank accounts

type of bank accounts

betterfor financial

enforcement day http

bancassurance model

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