FEIA.docx

**Financial Education and Investment Awareness** **"If you buy things, you do not need, soon you will have to sell things you need."** **Warren Buffett** **INTRODUCTION** Financial literacy means the basic personal financial skills of an individual -- to competently earn, spend, invest, save, bu...

**Financial Education and Investment Awareness** **"If you buy things, you do not need, soon you will have to sell things you need."** **Warren Buffett** **INTRODUCTION** Financial literacy means the basic personal financial skills of an individual -- to competently earn, spend, invest, save, budget and borrow money. It consists of personal financial management, planning, decision making on investment and tax planning. **Why is it important?** Financial literacy can safeguard individuals from dubious schemes. Making financial decisions is an essential aspect of daily life. Financial education has transformed itself, into an essential life skill today. Equipped with education leading to a state of awareness, students can empower themselves with decision regarding financing their higher education, meaningful investments and savings and inculcate value-oriented living philosophy. Financial education is a proactive program to provide adequate skills to make critical decisions. This is essential, not just from a micro economic perspective of an individual but also from a larger macroeconomic development of the country. It is the responsibility of the various stakeholders in the education system to introduce youngsters to the concepts of finance to help them to make better financial decisions in real-life situations. Everyone needs basic finance and should know how to differentiate between needs and wants. With awareness comes proper planning; once individuals narrow down on a financial goal, they can start saving. Different investment options cater to a variety of needs, but the investor should be aware of them. **MODULE -1** **Foundations of Finance** **Economics** is the social science that studies how societies allocate scarce resources for production, distribution, and consumption of goods and services. **Key Concepts:** - **Scarcity:** Resources (like time, money, land, labor) are limited, while human wants and needs are unlimited. - **Choice:** Because of scarcity, people must make choices about how to allocate resources. - **Efficiency:** Making the best use of available resources to satisfy as many wants and needs as possible. - **Distribution:** How goods and services are divided among members of a society. - **Consumption:** The use of goods and services to satisfy wants and needs. **Two Main Branches:** - **Microeconomics:** Focuses on the behavior of individual economic agents like consumers, firms, and markets. - **Macroeconomics:** Studies the economy as a whole, including topics like inflation, unemployment, and economic growth. In essence, economics is about understanding how people, businesses, and governments make decisions about allocating resources. Economics is derived from the two Greek words : Oikos meaning "house " Nomos meaning "management " 'oikonomia' means household management.Economics was first read in ancient Greece.Aristotle the Greek Philosopher termed Economics as a science of 'household management'. Adam Smith, considered as the father of economics, in his book "an inquiry into the nature and causes of wealth of nations".(1776) defined economics as the "**science of wealth**" British economist Alfred Marshall wrote the book "Principles of Economics" (1890) in which he defined economics as"**the study of man in the ordinary business of life "** Lionel Robbins published a book "An Essay on the Nature and Significance of Economic Science " in 1932. According to him ,"**Economics is a science which studies human behaviour as a relationship between ends and Scarce means which have alternative uses"** According to Samuelson,defined "**Economics is the study of how people and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future among various persons and groups of society."** **KEY TERMS IN ECONOMICS** - Income - Expenditure - Savings **Income:** In simple terms, Income refers to the amount of money earned by an individuals, business or a nation over a specific period.It is the inflow of resources into an economy or the money that a person receives in exchange of their labour/ products. However income doesn\'t have a standard definition.its definition varies according to the context in which it is used. For businesses,income refers to the revenue a business earns from selling its goods and services.For example,when you save money in your savings account,the interest generated is also considered income.There are different types of income in economics Personal Income ,Disposable Income,National Income,Per Capita Income Real Income ,Nominal Income and income from investments etc Some of the types of income include; - Wages - Salaries - Interest - Investment returns - Allowance /Pocket money - Government pensions /Gratuity payments **Expenditure** In economics,expenditure(or expense) is the amount of money spent on purchasing goods or services.It represents the outflows of resources from an economy.there are different types of expenditure. The meaning of expense is contextual.For a business,an expense is the cost of operations that a company incurs to generate revenue or income.Some common examples of business expenses include ; - Payment f wages/salaries - Factory /office lease /rental payments - Payment made to vendors for services (advertising agents,website maintenance etc) Expenditure can be classified into two categories : - Revenue expenses - capital expenses **Revenue Expenditure** refers to the expenditure that does-not crate an assets. Examples salaries and wages ,rent ,advertising etc.**Capital expenditure refers** to the expenditure that creates an assets.Examples,purchase of land,buildings and equipment,purchase of software etc. On an individual front ,expense include the basic cost of living expense like housing ,food ,transportation,child care,health care and other necessities.Of course ,the size of these expenses vary from person to person due to factors like life style and family size. Some of the basic expenses that are part of a family budget include ; - Housing loan repayment or rent - Utility expenses -gas ,electricity,water ,phone,internet / WiFi etc. - School / college fees - Health ,car and household insurance Payments - Fuel /transportation expenses - Entertainment expenses **Savings** Savings is the portion of income that is not consumed.It's the money set aside for future use and not spent immediately.In economics,savings are crucial for investment and economic growth.In the simplest form of understanding savings refers to an individuals unspent earnings.It is the amount that remains after meeting the household and other personal expenses over a given period ,for example,on a monthly basis. **Savings (unspent income ) = Income -Expenditure** **Factors of Production :** Factors of production are the essential resources used in the production process to create goods and services.The factors of production include land, labour, capital and entrepreneurship. The Four Main Factors of Production: **Land:** land encompasses all natural resources, including: Physical land (for farming, construction, etc.) Minerals, oil, and other resources Water, forests, and other natural assets. **Labor:** labour refers to the human effort used in production, including: Physical labor (factory workers, construction workers) Intellectual labor (engineers, scientists, managers) Skilled labor (teachers, doctors, lawyers). **Capital**: Capital involves the manufactured resources used in production, such as: Machinery and equipment, Buildings and infrastructure Technology and software **Entrepreneurship:** an entrepreneur is a person who combines all three factors of production-land, labor, and capital efficiently to create new products or services. Entrepreneurs take risks, innovate, and drive economic growth. **GROSS DOMESTIC PRODUCT (GDP)** **GDP :** Is the total monetary or market value of all the finished goods and services produced within a country\'s borders in a specific time period.There are two primary methods or formulas by which GDP can be determined: - Expenditure approach - Income approach **Expenditure approach** The expenditure approach is the most commonly used GDP formula, which is based on the money spent by various groups. Calculating the GDP of a country is by using the expenditure Method ,as given below : **GDP =C+G+I+NX** Where, C = consumption or all private consumer spending within a country's economy, including, durable goods, non-durable goods, and services. G = total government expenditures, including salaries of government employees, road construction/repair, public schools, and military expenditure. I = sum of a country's investments spent on capital equipment, inventories, and housing. NX = net exports or a country's total exports less total imports. **Income Approach** Income approach refers to the total income generated by the goods and services produced. The formula for calculating GDP by the income approach is , **GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income** **Problem No-1** Calculate GDP in this simple economy: Consumer Purchases: Rs 100 per year Investment purchases: Rs 50 per year Government Purchases: Rs 20 per year Total Exports: Rs 50 per year Total Imports: Rs 70 per year. **Solution,** **GDP = C + G + I + NX (X-M)** **GDP = 100 + 20 + 50 + (50-70) = Rs. 150** **MEANING AND SCOPE OF ECONOMICS** Economics is a social science that studies the production, distribution and consumption of goods and services with in a society.It explores how individuals,business and governments make choices about allocating scarce resources to satisfy unlimited wants. In essence, economics is about managing scarcity. Since resources are limited, while human desires are infinite, economics seeks to understand how these resources can be best utilized to maximize overall well-being. **Scope of economics** Scope means area of study.In discussing the scope of economics,we have to indicate whether it is science or an art and a positive and normative science ,micro and macro economics,inductive and deductive method. I. **Economics -A science and an Art** a. **Economics is a science** : science is a systematized body of knowledge that traces the relationship between cause and effect. A science teaches us to know. Another attributes of science is that its phenomena should be amenable to measurement.Applying these features ,we find that economics is a branch of knowledge where the various facts relevant to it have been systematically collected ,classified and analyzed. b. **Economics is also an art :** An art is a system of rules for the attainment of a given period. An art teaches us to do. Economics offer us practical guidance in the solution of economic problems.Therefore,economics is both a science and an art. **ii) Positive and Normative science** **a) Positive science** :It only describes what it is. Focuses on facts, data, and cause-and-effect relationships.Positive science does not indicate what is good or what is bad to the society.Aims to describe, explain, and predict economic phenomena. Statements can be tested and verified through empirical evidence. Example: \"If the government increases the minimum wage, unemployment will rise.\" **b) Normative science: N**ormative science prescribes what it ought to be Involves value judgments, opinions, and beliefs about what should be.Concerned with what is considered desirable or fair. Statements cannot be proven or disproven with data. Example: \"The government should increase the minimum wage to ensure a living wage for all workers.\" **iii) Micro and Macro economics** a\) **Microeconomics f**ocuses on the behavior of individual economic units, such as consumers, producers, and firms. It examines how these units make decisions, interact with each other, and influence market outcomes. **b) Macroeconomics** deals with the economy as a whole, analyzing aggregate economic variables and their interrelationships. It focuses on factors that affect entire economies, such as national income, employment, inflation, economic growth, and government policies. **iv) Inductive and Deductive method** **a) Inductive method** : is also called as Bottom-up approach: Starts with specific observations and moves towards general conclusions. Example: Observing price changes of a particular commodity over time and concluding that there is a general relationship between price and quantity demanded. **b)Deductive method :** is also called as Top-down approach: Starts with general principles or theories and applies them to specific situations. Example: Using the law of demand (general principle) to predict the impact of a price increase on the quantity demanded of a product. **FACTORS INFLUENCING DECISION-MAKING IN INVESTMENTS** **Micro Environment** The micro environment consists of factors that directly impact a company\'s operations and are relatively close to the organization.It\'s often referred to as the internal and task environment. The micro environment of the organization consists of those elements which are controllable by the management. However, the micro environment does not affect all the companies in an industry in the same way, because the size, capacity, capability, and strategies are different. Some of the key micro-environment business factors are listed below: - **Customers**: The target market and their needs, preferences, and buying behavior. - **Suppliers**: Providers of raw materials, components, or services essential for production. - **Competitors**: Rival businesses offering similar products or services. - **Marketing intermediaries:** Channels through which products reach customers (retailers, wholesalers, distributors). - **Public:** Groups or individuals with an interest in the company (media, government, local community). **Macro Environment** The macro environment comprises external factors that broadly affect businesses and are beyond a company\'s control. It\'s often referred to as the general environment. Some of the key macro-environment business factors are listed below: **Demographic factors** Demographics refers to age, language, lifestyle, income distribution, cultural differences, etc. Financial literacy depends on demographics. **Technology factors** Technological growth and advancement within a nation greatly influences the production and sale of goods or services. Innovation, automation, and internet facilities are some examples of technological factors. **Natural and physical factors** Business performance depends on various geographical and ecological forces---availability of natural resources, climate change, weather conditions, biological balance, pollution, etc. **Political and legal factors** The government imposes various regulations on businesses---employment laws, import/export laws, copyright laws, labour laws, health and safety laws, and discrimination laws. These are known as political and legal factors. **Social and cultural factors** A business needs to be socially responsible and culturally aware. Socio-cultural factors comprise education, population growth rate, life expectancy rate, social status, buying habits, religion, etc. **Economic factors** Consumer buying decisions are significantly impacted by macro-economic factors---demand-supply, inflation, interest rates, taxes, exchange rates, and recession. **Financial Planning :Meaning and Need -Life goals and Financial goals** **Meaning of Financial Planning** Financial planning is a systematic process of managing your financial resources to achieve your personal or business objectives. It involves assessing your current financial situation, setting clear financial goals, creating a plan to achieve those goals, and regularly monitoring and adjusting your plan as needed. **Need for Financial Planning** Financial planning is crucial for several reasons: **Achieving financial goals**: Whether it\'s buying a home, saving for retirement, or funding your children\'s education, a well-crafted plan helps you stay on track. **Managing risks**: Life is unpredictable. Financial planning helps you prepare for unexpected events like job loss, medical emergencies, or property damage. **Making informed decisions**: Understanding your financial situation empowers you to make wise decisions about spending, saving, investing, and borrowing. **Reducing financial stress**: Having a clear financial plan can alleviate stress and anxiety about money. **Building wealth**: By making smart financial choices, you can increase your wealth over time. **Life goals and financial goals** Life goals are the aspirations and dreams that guide your life\'s journey. They are the destinations you aim to reach, the experiences you want to have, and the person you want to become. These goals are unique to each individual and reflect your values, passions, and desires. **Financial goals** It is very essential that we identify our financial goals (for example, wanting to study abroad for your higher education or buying a car in 2 years time). Our financial goals become aspirations for saving and spending money.A financial goal is a scientifically defined financial milestone that you plan to achieve or reach.Financial goals comprise earning,saving,investing and spending in proportions that match your short term ,medium term or long term-plans. **Types of Financial Goals** Financial goals are the stepping stones to achieving your overall financial well-being. They provide a clear direction for your money and help you make informed decisions.Financial goals are typically categorized based on the time frame required to achieve them: **Short-Term Goals** Short term goals are typically achieved within a year. They focus on immediate needs or desires. For examples, - Building an emergency fund: Creating a financial cushion for unexpected expenses. - Paying off debt: Eliminating credit card debt or other loans. - Saving for a vacation: Funding a short-term trip or getaway. - Buying a new car: Saving for a down payment or purchasing a vehicle outright. - Home renovations: Accumulating funds for home improvement projects. **Medium-Term Goals** Medium-Term Goals usually take between one to five years to accomplish. They often require more significant savings and planning. For example, - Down payment for a house: Saving for a substantial initial payment on a property. - Higher education funding: Saving for a child\'s college education or personal advanced studies. - Starting a business: Accumulating capital to launch a new venture. - Major purchases: Saving for a significant purchase like a boat. **Long-Term Goals** These goals typically have a horizon of five years or more. They often involve substantial savings and investment. For examples, - Retirement savings: Building a nest egg for your golden years. - Child\'s wedding: Saving for a child\'s wedding expenses. - Early retirement: Accumulating enough wealth to retire before the traditional age. - Legacy planning: Ensuring financial security for heirs **UNDERSTANDING FINANCIAL LIFE CYLE AND PERSONAL BUDGET** The financial life cycle is a framework that categorizes different stages of an individual\'s life based on financial goals, income, expenses, and responsibilities**.** **Wealth Accumulation** Formative Years (Teenagers): Developing financial literacy, learning about budgeting, and understanding the value of money. Young Adulthood (Early 20s): Establishing independence, building credit, and starting to save for short-term goals like education or a down payment on a home. Early Career (Late 20s to Early 30s): Increasing income, focusing on debt repayment, and starting to invest for long-term goals like retirement. Family Formation (Mid-30s to Early 40s): Managing increased expenses, saving for children\'s education, and considering life insurance and disability insurance. Peak Earning Years (Late 40s to Early 50s): Maximizing retirement savings contributions, diversifying investments, and planning for estate planning. **Wealth Preservation** Pre-Retirement (Late 50s to Early 60s): Reducing expenses, generating income through investments, and exploring retirement living options. Early Retirement: Adjusting to reduced income, managing healthcare costs, and potentially downsizing. Late Retirement: Managing healthcare and long-term care expenses, potentially relying on Social Security and pensions. **Wealth Distribution** Estate Planning: Transferring assets to heirs, minimizing estate taxes, and considering charitable giving. **PERSONAL BUDGET:** **Meaning: A** personal or household budget is a summary that compares and tracks your income and expenses for a defined period, typically one month. While the word "budget" is often associated with restricted spending, a budget does not have to be restrictive to be effective. **Sample/Template of Personal Budget:** ------- --------------------------------------- --------- D G Electricity /Gas /Water H Phones /Mobiles/Internet Expenses I Fuel /Transportation J Insurance Payments K School /Colleges Fees L Child Care/Sports /Leisure activities M Clothing /Shoes/Hairdressing etc N Travel /Holiday/Movies /Outing O Incidentals / other Expenses **P** **TOTAL EXPENSES (B to P)** **XXX** **Uncommitted Income (A- P)** **XXX** ------- --------------------------------------- --------- **Financial Statements: Meaning of Income Statement, Balance Sheet, Cash Flow Statement.** **Income Statement (Profit and Loss Statement)** Shows the financial performance of the company/firm over a period. Indicates the revenues and expenses during the period.The period is an accounting period/year, April-March.The accounting report summarizes the revenue items, the expense items, and the difference between them (net income) for an accounting period.The main purpose is to know how much profit or loss the entity has made during a particular year. **Balance sheet statement** :A financial statement that reports company\'s assets, liabilities, and shareholder equity. Provides a snapshot of a company\'s finances (what it owns and owes) as of the date of publication. The balance sheet adheres to the following formula:Assets = Liabilities + Shareholders' Equity. **Cash flow statement :**Shows the flow of cash and cash equivalents during the period under report.and breaks the analysis down to operating, investing and financing activities. It helps in assessing liquidity and solvency of a company and to check efficient cash management. Three key components of Cash flow statements: - Cash from operating activities - Cash from investing activities - Cash from financial activities - **Cash from operating activities:** This includes all the cash inflows and outflows generated by the revenue-generating activities of an enterprise like sale & purchase of raw materials, goods, labour cost, building inventory, advertising, ship- ping the product, etc. - **Cash from investing activities:** These activities include all cash inflows and outflows involving the investments that the company made in a specific time period such as the purchase of new plant, property, equipment, improvements capital expenditures, cash involved in purchasing other businesses or investments. - **Cash from financial activities:** This activity includes inflow of cash from investors such as banks and shareholders by getting loans, offering new shares etc, as well as the outflow of cash to shareholders as dividends as the company generates income. They reflect the change in capital & borrowings of the business. **Time Value of Money -- Meaning, Compounding, Discounting (Simple Problems), CAGR (Meaning and Formula)** Time value of money is a fundamental financial concept that states that money you have now is worth more than the same amount of money in the future. This is because money can be invested and earn interest over time, increasing its value The money available at the present time is worth more than the same amount in the future since it has the potential to earn returns. **For example, Suppose the Rs.100 received now is placed in a one-year bank deposit yielding 6.5 % p.a. After a year, the value would grow to Rs.106.50.** **Compound rate and Discount Rate** Future inflows are discounted by a relevant rate to reach their present value (PV); this rate is known as the **discount rate.** Present inflows are increased at a relevant rate to reach their future values (FV): this rate is known as the **compound rate.** To find out the amount at the end of the period, on compound interest basis, the following formula is used: **A = P {1 + (R/100)}N** Where A = Amount at the end of the period when interest is compounded annually P = Principal at the beginning of the period (also the original investment amount) R = Rate of interest N = No. of periods Once the amount is calculated, we can then calculate the Compound Interest (CI) using the following formula: **CI = A -- P** **Problem No:1** What is the compound interest (CI) on Rs. 10,000 for 2 years at 10% per annum compounded annually? **Solution ,** **A = P {(1 + (R/100))N** **A = 10,000 {(1 + (10/100))2** **A = 12,100** **CI = A -- P → CI = 12,100 -- 10,000** **CI = 2,100** **Rule of 72** **Problem No:1** If you invest Rs.1,00,000/- at an interest rate of 8% p.a. compounded annually, how many years will it take for the investment to double? **Solution ,** **Using the Rule of 72** **Number of years required to double the investment = 72/ Rate of interest** **Number of years required = 72 / 8** **Answer = 9 years** **Compounded Annual Growth Rate (CAGR)** The compounded annual growth rate (CAGR) of an investment is the underlying compound interest rate that equates the end value of the investment with its beginning value. **The formula for CAGR (in decimals, not %) can be written as:** **CAGR = ( End value/Beginning Value ) 1/n - 1** **Problem :1** Consider an investment of Rs.100 that grows to Rs.120 in 2 years. In this case, End Value (or FV) = 120 Beginning Value (or PV) = 100. No. of years 'n' = 2 **Solution,** **CAGR = ( End value/Beginning Value ) 1/n - 1** **CAGR = (120/100)1/2 - 1** **CAGR = (1.2) 1/2 - 1** **= 1.095 - 1** **= 0.095 OR 9.5%** **Module- 2** **BANKING IN INDIA** The banking industry in India is governed and regulated by the Reserve Bank of India (RBI). RBI was set up under the Reserve Bank of India Act, 1934. Banks in India are regulated under the Banking Regulation Act, 1949. The Act provides for the framework under which commercial banking in India is supervised and regulated. **DEFINITION OF BANKING** **Banking Company:** The Banking Regulation Act, 1949 defines "a banking company as a company which transacts the business of banking in India (Section 5 (C)". **Banking:** Section 5(b) defines banking "as accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise". **Need for Banking** A sound banking system is necessary to achieve the following objectives: 1.**Savings and Capital Formation:** Banks play a vital role in mobilizing the savings of the people and promoting the capital formation for the economic development of a country. 2.**Channelization of Savings:** The mobilized savings are allocated by the banks for the development of various fields such as agriculture, industry, communication, transport, etc. 3.**Implementation of Monetary Policy:** A structured banking system can easily implement the monetary policy because development of the economy depends upon the control of credit given by the banks. So, banks are necessary for the effective implementation of monetary policies. 4.**Encouragement of Industries:** Banks provide various types of financial services such as granting cash credit loans,issuing letter of credit, bill discounting, etc., which encourages the development of various industries in the country. 5.**Regional Development:** By transferring surplus money from the developed regions to the less developed regions, banks reduce regional imbalances. 6.**Development of Agriculture and Other Neglected Sectors:** Banks are necessary for the farmers. It also encourages the development of small-scale and cottage industries in rural areas. **Functions of Banks** Banks perform several functions that are essential for the smooth operation of the economy. 1.**Acceptance of Deposit:** A bank accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers. 2.**Giving Advances/Loans**: A bank lends out money in the form of loans to those who require it for different purposes. These loans can be in the form of retail loans (loans given to individuals) or corporate loans (loans given to businesses). 3.**Payment and Withdrawal:** A bank provides easy payment and withdrawal facility to its customers in the form of cheque, drafts, debit cards, Automated Teller Machines (ATM\'s), etc. It also brings bank money in circulation. The new age banking focuses on providing payment services using mobile technology to enable faster transfers, using Unified Payment Interface (UPI), etc. 4.**Ever increasing Functions including agency and utility services:** Banking is an evolutionary concept. There is continuous expansion and diversification as regards the functions, services and activities of a bank, which includes wealth/portfolio management services, utility services, agency services, insurance/mutual fund advisory services, etc. **TYPES OF BANK DEPOSITS** Deposits are normally classified into "Demand Deposits" and "Time Deposits". Demand deposits are those that can be be withdrawn or transferred by the customer without previous notice to the bank. The deposits are maintained to meet liquidity and transaction needs.There are two types of demand deposits. Current Accounts and Savings Accounts. Term/Time Deposits are also called Fixed Deposits. These are repayable after the expiry of a specified period varying from 15 days to 120 months. The period is fixed at the time the deposit is made. Banks in india offer facilities for opening different types of accounts to their customers. A variation of this type is the 'Recurring Deposit'. **Current Account** A Current Account or Demand Deposit Account is a running and active account which may be opened with a bank by a businessman or an organisation. This account can be operated any number of times during a working day. A current account is a business account and can be opened by individuals, firms (proprietorship or partnership), Hindu undi- vided family (HUF), trusts, companies (Private Ltd. or Public Ltd.), societies, clubs, and associations who operate for profit. One of the key points to remember about current accounts is that they do not carry any interest payments. Also, based on the dealings of the customer and the discretion of the bank, overdraft facility can be allowed in these accounts. **Savings Account** Savings bank account is very popular among the general public. Savings account is meant for small businessmen and individuals who wish to save a little out of their current incomes to safeguard their future and also to earn some interest on their savings. A savings account can be opened with as a small sum of Rs. 500. Savings account holders are allowed to deposit cheques, drafts, dividend warrants, etc., which stand in their name only. Earlier Banks were allowed to pay interest on deposits maintained in savings accounts according to the rates prescribed by the Reserve Bank of India but now banks are free to pay any rate of interest on the savings account balances. **Fixed Deposit Account** Money in this account is accepted for a fixed period, say one, two, or five years. The money thus deposited cannot be with- drawn before the expiry of the fixed period, unless the depositor is willing to pay a per-closure penalty. The rate of interest on this account is higher than that on other accounts. The longer the period of fixed deposit, the higher is the rate of interest. Fixed deposits are also called "time deposits" or "time liabilities." **Recurring Deposit Account** The recurring deposit account has gained wide popularity these days. Under this, the depositor is required to deposit a fixed amount of money every month for specific period of time. After the completion of the specified period, the customer gets back all his deposits along with the cumulative interest accrued on them. Recurring deposit accounts provide a good way to save in small amounts for use in the future, e.g., education of children, marriage of children, etc. **Non Resident Accounts** NRI can open following types of accounts with banks in India, which hold authorized dealer licenses and with other banks, specifically authorized by the Reserve Bank of India (RBI) to maintain accounts of NRIs. **A.Rupee Accounts: NRIs can open following types of rupee accounts:** i.Non-resident (Ordinarily) Account or Ordinary Non-resident Rupee Account (NRO A/c) ii.Non-resident (External) Rupee Account (NRE A/c) **B.Foreign Currency Account: Non-Resident (Foreign Currency) Account (FCNR A/c)** **Foreign Currency (Non-Resident) Accounts (Banks) Scheme (FCNR Accounts)** These are accounts where the NRIs hold the balances in foreign currency. These types of accounts are maintained in British Pound, USD, DM, Japanese Yen, EURO or other currencies as may be designated by the RBI from time to time. Interest rates are linked to the international rates of interest of the respective cur- rencies as determined and notified by the RBI to Authorized Dealers (ADs) from time to time. **What is a Non-Resident External Rupee (NRE) Account** - The NRE account is an Indian rupee-denominated account - These accounts can be in the form of savings, current, recurring, or fixed deposits - The foreign currency you deposit into the account is converted to INR -  You can transfer your funds (Principal & Interest amount) to a foreign account from an NRE account without any complications and restrictions. - The amount you deposit into these accounts must be earned outside India. **What is a Non-Resident Ordinary Rupee (NRO) Account** - An NRO account is a savings or current account held by NRIs in India to manage their income earned in India. - Account-holders can deposit and manage their accumulated rupee funds without any hassle. - The account allows you to receive funds in Indian or Foreign currency. You can apply for an NRO account jointly with a resident Indian or even an NRI. - However, the interest you earn in this account is subject to TDS (Tax Deducted at Source). If an individual satisfies any one of the following conditions, he is said to be Resident in India for that financial year. The conditions are:- He is in India for a period of 182 days or more in that financial year OR He is in India for 60 days or more during that financial year and has been in India for 365 days or more during 4 previous years immediately preceding the relevant financial year. **FCNR stands for Foreign Currency Non-Resident Account :** if you are an NRI and wish to maintain a Fixed Deposit Account in India, you can opt for an FCNR Account that allows you to save money earned overseas in Foreign Currency. Mostly banks book FCNR deposits in the following currencies. - US Dollars - Pounds Sterling - Euro - Japanese Yen - Australian Dollars Since your money will be held in foreign denomination, you can be saved the risk of exchange rate fluctuations. FCNR deposits can be opened for tenures of 1 year upto 5 years.Since your money will be held in foreign denomination, you can be saved the risk of exchange rate fluctuations. FCNR deposits can be opened for tenures of 1 year upto 5 years. **ROLE OF RBI AS BANKING REGULATOR** 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 Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as under: **"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; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth."** **The Reserve Bank of India (RBI) is the central bank of India, responsible for overseeing the nation\'s monetary system.** **Main Functions of Reserve Bank of India** Its primary functions can be categorized into several key areas: **Monetary Policy** - Controlling money supply: The RBI regulates the amount of money in circulation to maintain price stability and economic growth. - Interest rate determination: The RBI sets benchmark interest rates to influence borrowing costs and investment decisions. - Managing inflation: The RBI strives to keep inflation within a target range to protect the purchasing power of the rupee. **Banking Regulation and Supervision** - Licensing and regulation of banks: The RBI grants licenses to banks and oversees their operations to ensure financial stability. - Supervision of the banking system: The RBI monitors banks\' financial health and compliance with regulations. - Protection of depositors\' interests: The RBI works to safeguard the interests of bank depositors. **Issue and Management of Currency** - Currency issuance: The RBI is responsible for printing and distributing banknotes and coins. - Currency management: The RBI ensures the availability of adequate currency supply and manages currency circulation. **Banker to the Government** - Managing government accounts: The RBI maintains the government\'s banking accounts and handles its transactions. - Government borrowing: The RBI assists the government in raising funds through the issuance of bonds and securities. - Advising the government: The RBI provides economic and financial advice to the government. **Custodian of Foreign Exchange Reserves** - Managing foreign exchange reserves: The RBI oversees India\'s foreign exchange reserves to protect the rupee\'s value. - Intervention in the foreign exchange market: The RBI intervenes in the foreign exchange market to manage exchange rate fluctuations. **Other Functions** - Clearinghouse functions: The RBI acts as a clearinghouse for bank transactions. - Development of the financial system: The RBI promotes the growth and development of the financial system. - Financial inclusion: The RBI works to expand financial services to under-served populations. **DEPOSIT INSURANCE (PMJDY)** **Insurance of Bank Deposits** To assure the depositor about the security of their deposit in any type of account with banks, the Deposit Insurance and Credit Guarantee Corporation was created by the Government of India in 1961, through an act of parliament. Under this scheme, which came Into effect from 1st January 1962, a depositor having a deposit in any bank, which is not able to meet its liability of paying back the deposit amount to its depositors due to bankruptcy, can approach the corporation for remedy. **As per the provision of the act, the corporation will pay the aggrieved depositor a sum of Rs. 5 lakh per account in the same capacity**. **Pradhan Mantri Jan-Dhan Yojana (PMJDY)** Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure access to financial ser- vices, namely, a basic savings & deposit accounts, remittance, credit, insurance, pension in an affordable manner. Under the scheme, a basic savings bank deposit (BSBD) account can be opened in any bank branch or Business Correspondent (Bank Mitra) outlet, by persons not having any other account. **Benefits under PMJDY** a)One basic savings bank account is opened for unbanked person. b)There is no requirement to maintain any minimum balance in PMJDY accounts. c\) Interest is earned on the deposit in PMJDY accounts. d\) RuPay debit card is provided to the PMJDY account holder. e\) Accident insurance cover of Rs.1 lakh (upgraded to Rs. 2 lakh to new PMJDY accounts opened after 28.8.2018) is available with RuPay card issued to the PMJDY account holders. f\) An overdraft (OD) facility up to Rs. 10,000 to eligible account holders is available. g\) PMJDY accounts are eligible for Direct Benefit Transfer (DBT), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Atal Pension Yojana (APY), Micro Units Development & Refinance Agency Bank (MUDRA) scheme. **TRADITIONAL AND NEW-AGE BANKING** **Traditional Banks:** Generally brick and mortar model. **Neo-banks:** Highly technology-oriented **Traditional and Neo Banking Models** Neo-banks are changing the face of fin-tech by bridging the gap between the services that traditional banks offer and the evolving expectations of customers in the digital age. **What are Neo-banks?** Neo-banks are online-only financial technology (fin-tech) companies that operate solely digitally or via mobile apps. Neo-banks are digital banks without any physical branches offering services that traditional banks don't. In India, these firms don't have a bank licence of their own, but rely on partner banks to offer licensed services as the RBI doesn't allow banks to turn 100% digital yet (though some foreign banks offer digital-only products through their local units). **How are they different from other types of banks?** Neo-bank vs Traditional bank- Neo-banks leverage technology and artificial intelligence (AI) to offer a range of personalized services to customers while traditional banks follow an omni-channel approach through both physical (branches and ATMs) and digital banking presence. While Neo-banks don't have the funds or customer base to overthrow traditional banks, they are powered by innovation to launch features and develop partnerships to serve their customers more quickly than traditional banks. Neo-banks cater to retail customers, and small and medium businesses, which are generally under-served by traditional banks. Venture capital and private equity investors have been keeping a keen eye on the market opportunities for Neo-banks and are taking an increasing interest in them over traditional banks. Neo-bank vs Digital bank- A digital bank and a neo-bank aren't quite the same. Digital banks are often the online-only subsidiary of an established and regulated player in the banking sector while neo-banks exist solely online without any physical branches independently or in partnership with traditional banks. **DEBIT AND CREDIT CARDS** **What is a debit card?** Debit cards are issued by banks against current or savings accounts. When the cardholder swipes his/her debit card to make a payment or withdraw money from an ATM, **the money is directly deducted from the card holder\'s account.** This could pose a problem during emergencies, in case the account holder does not have sufficient balance in the account. **What is a credit card?** A credit card gives the cardholder a credit **limit from where he/she can borrow funds to make payments as and when required.** The cardholder needs to pay back the borrowed amount within a stipulated time, following which the limit is restored. Interest is charged on the outstanding amount only in case of delayed payments. **DIGITAL PAYMENT SYSTEM** Payment and Settlement Systems in Indian Banking Sector In India, the RBI oversees the payment systems. The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), chaired by the Governor, RBI, spearheads this responsibility. The creation of a new department viz., **Department of Payment and Settlement Systems (DPSS)** by RBI in the year 2005 to focus exclusively on payment and settlement systems, and subsequent legislation of the Payment and Settlement Systems Act, 2007 (PSS Act) set the stage for a new era in the history of payment systems in the country. The Bank for International Settlements' (BIS) Committee on Payments and Market Infrastructures (CPMI) defines payment systems transactions to include the total transactions undertaken by all payment systems in the country. Considering this definition, payment systems transactions in India would comprise of transactions processed and settled through: a)Paper Clearing \[Magnetic Ink Character Recognition (MICR), Non-MICR, Cheque Truncation System (CTS), Express Cheque Clearing System (ECCS)\]; b)Bulk electronic transaction processing systems like Electronic Clearing Service (ECS), with its variants Regional ECS and National ECS; National Automated Clearing House (NACH) -- Debit and Credit; c)Card Payments (Debit, Credit and Electronic); d)Large Value \[Real Time Gross Settlement (RTGS)\]; e)Retail \[National Electronic Funds Transfer (NEFT)\]; f)Fast Payments \[Immediate Payment Service (IMPS), Unified Payments Interface (UPI)\]; and g)e-Money \[Prepaid Payment Instrument (PPI) Cards and Wallets) Except (a) above and cash transactions, all other payments constitute digital transactions In addition to the above payment and settlement systems, RBI has also institutionalized a well-established clearing and settlement system for Government Securities. **NEFT stands for National Electronic Funds Transfer.** - Started in November 2005, NEFT is an electronic funds transfer system set up and managed by the Reserve Bank of India. - Before December 2019, RBI had fixed timings during which NEFT transactions can be processed. Any NEFT transaction will be processed only between 8:00 AM and 6:30 PM from Monday to Friday, and 8:00 AM to 12:00 PM on Saturdays. - However, from 2020, NEFT transactions can be performed 24\*7 - There is a fee applicable on all NEFT transactions; the amount varies from Rs. 2.5 to Rs. 25, depending on the amount being transferred - As per RBI guidelines, the payments made via NEFT are processed and settled in batches of half-hour **The acronym \'RTGS\' stands for Real Time Gross Settlement** - \'Real Time\' means the processing of instructions at the time they are received; \'Gross Settlement\' means that the settlement of funds transfer instructions occurs individually. - RTGS is available 24x7x365 with effect from December 14, 2020. - RTGS transactions / transfers have no amount cap set by RBI. - The minimum amount to be remitted through RTGS is ₹ 2,00,000/- with no upper or maximum ceiling. **Immediate Payment Service (IMPS)** is an instant interbank electronic fund transfer service through mobile phones - Instant - Available 24 x7 (functional even on holidays) - The per transaction limit on IMPS is Rs. 5 lakh **Mobile Banking** Mobile banking is a service provided by banks that allows customers to conduct financial transactions remotely using a mobile device such as a smartphone or tablet. It\'s essentially banking at your fingertips. **Types of mobile banking services :** - Account information access - Transactions - Investments - Support services - Content and news **Mobile Wallet :** A mobile wallet is essentially a digital version of your physical wallet. It\'s an app on your smartphone that stores your payment information (credit/debit cards), loyalty cards, coupons, and sometimes even digital tickets or boarding passes**.** **Types of Mobile Wallet :** - Open wallets - Closed wallets - Semi-closed wallets