1. Prologue
2. Bancassurance: Reena Benerjee Committee
3. 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
4. What is Financial Stability and Development Council (FSDC)?
5. Enforcement Directorate
   1. ED: Functions
   2. ED: Future reforms
6. Hindi translation of technical terms
7. CSAT mock questions
8. Answers to Mock CSAT questions

Prologue

Those inquiring about Hindu science tech compilation, yes they’ll 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 tech’s number will come. That’s 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 (you’re 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. Why is RBI and IRDA having disagreement over Bancassurance model? Which model is better for financial inclusion in India?
   2. Recently, some Committee suggested setting up a “Financial Resolution Authority”? What will it do? Who will benefit from this?

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 Company’s 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 didn’t 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 RBI’s 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)

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 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 doesn’t allow stock brokers to run banking operations, then why should IRDA force Bankers to become brokers? It’s illogical.

in other words, Reena Benerjee committee has endorsed Rajan’s 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.
• It’ll 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, we’ve 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%
1988	National housing Bank	100% RBI
1990	SIDBI	Sarkaari banks and financial institutions like 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 your car.
• 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 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 doesn’t fall from sky, if you get health insurance then you’ve 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 DICGC’s behalf to make sure they’ve 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 doesn’t 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 doesn’t repay his loan, we’ll pay you (Bank) the loan money….This is credit guarantee, one type of insurance.
• In 2014, Bharatiya Mahila bank announced they’ll 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 doesn’t need to worry because they’re 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 agency	Financial 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 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 A’bad (Mahim Gupta) 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!	In 2014 alone, ED attached assets worth 1000+ crores. + ED also investigating people who had given money to that A’bad 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

(I’ve copied following points from President’s 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.
• We’ve 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	दीवानी कानून
Credit Guarantee	ऋण अदायगी गारंटी
Criminal law	फौजदारी कानून
Deposit Insurance and Credit Guarantee Corporation	निक्षेप बीमा और प्रत्यय गारंटी निगम
Enforcement directorate	प्रवर्तन निदेशालय
Financial redressal agency	वित्तीय शिकायत निवारण एजेंसी
financial resolution authority	वित्तीय संकल्प प्राधिकार
Financial Stability and Development Council	वित्तीय स्थिरता और विकास परिषद
Foreign exchange	विदेशी विनिमय
Minor account	नाबालिग खाता
Money laundering	धनशोधन
multilateral cooperation	बहुपक्षीय सहयोग
PMLA	धनशोधन रोक अधिनियम
Terror Financing	आतंकवाद वित्तपोषण
Bitcoin	अभी इसका क्या हिंदी हो सकता है? हाहाहा

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 RBI’s 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 doesn’t 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 doesn’t 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, 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 compilations published so far.