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The Financial Bulletin


Money Matters Club IBS,Hyderabad Established—2005

Editorial Enquiries Contact Money Matters Club Contact No +919948564613, +919573462013 Advisor Dr. S Vijayalaxmi Faculty Co-ordinator Dr. Amlan Ghosh Student Co-ordinator Kanchan Kumar Roy Editor Vikas Singh & Kanchan Kumar Roy Advertising Contacts +9573462013

Dear Readers, We congratulate the winner of the “Article of the month” award, Siddhartha Banerjee from IFMR, Chennai for his article “The economic crisis in Cyprus-what is in store for it in future?” . As we are moving to the second year of our esteemed newsletter "The Financial Bulletin" we move onto the second issue of the newsletter. In edition we have included two new sections in which the Internship experience and quiz section. We received a lot of diverse articles this month. Rupee have recently depreciated a lot and touched 60.05. The highest it can compared to the US dollar. Though Bernanke mentioned that they are going to easy the QE by September but still the downfall of rupee continues. There is also a lot of information related to Merger and Acquisition- A boon or curse, Derivatives, impact of the new banking licenses which was to be applied by the latest 1st July.

Happy Reading!!! Newsletter Editor

Vikas Singh Can we help? For any enquiries ,subscription and advertisement email us @ You can log into

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CONTENTS 04 Scenario of rupee deprecia- 24 Impact of the new banking tion as a whole in an economy -by Banisha Chopra, IBS Hyderabad

licenses on the banking sector in India. -by Niraj Dadhaniya, JBIMS

07 Derivatives – A synonym for Gambling? -by Ashwini Iyer, IBS Hyderabad

10 Mergers and Acquistions-


Trade Deficit and its implications on macro economy -by Nitin Singh, SIMS Pune

Boon or Curse

32 Ponzi Schemes and its

-by Ekta Singh, IBS, Hyderabad

Effect on the Developed World

13 The economic crisis in Cyprus-what is in store for it in future? -by Siddhartha Banerjee, IFMR Chennai

16 Euro crisis myths

- by Saumya Rastogi, NMIMS Hyderabad

35 BC MODEL – a revolution in banking service is the pathway to promote financial inclusion in India

–by Ishita Bhuyan, IIT Roorkee

- by Priyanka & Souvik, NIT Silchar

19"Capital Market" Ultimate

40 DE SHAW SIP Experience

Place to make Money

- Ekta Singh, IBS, Hyderabad

-by Jewel Kumar Roy, University Of Pune

21Hedge Funds: The future of


Indian capital markets -by Kali Prasad Bhogaraju, BITS Pilani

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Page 4

SCENARIO OF RUPEE DEPRECIATION AS A WHOLE IN AN ECONOMY With the Indian rupee is shedding over 11.5%

This decline in rupee could also worsen the

in value since the beginning of the fiscal year

inflation – putting an inflationary pressure

in April 2013 and reached an all-time low of

and is the matter of concern of fiscal deficit as

60.73 against the US dollar on 26th June 2013

it is reflecting the Current Account Deficit

, the current depreciation in Indian rupee has

(CAD) of India which represents the Balance

put a catastrophic impact in an Indian

sheet of India’s commercial transactions with

economy. Such a persistent decline in an

rest of the world. A continuous surge in

Indian currency will have a cascading effect

imports leads to trade imbalance which causes

of making imports costlier as structurally

current account to become negative where A

India is an Import intensive country which is


a cause of concern. With the fixed exchange

imports and exports where imports exceeds

rate having been long done away , the export

exports and thus leads to CAD. Which is

sector is standing to gain from the current

again bridged by the Foreign investment i.e.

trend and can have a reverse trend of

raising money from foreign markets which


leads to a problem of increase in Cost of

Basically, currency depreciation is “the loss

Borrowings which has impacted on the debt

of value of country’s currency with respect to

sector of the economy and also the exchange

indicates the excess gap between the

the other foreign currencies”. The rupee has declined almost 6.34% from march,2012 to the beginning of the fiscal year 2013. As the rupee is showing a persistent downturn impacting the Indian economy , this is putting an adverse effect in India’s imports of some key commodities viz., imports on Crude-oil, Thermal coal, Fertilizers and imports on Vegetables oil.

The depreciating

rupee is an outcome of deeply routed illness


that is affecting our economy.

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Page 5

rate drives away the foreign investors which in

to which investors and international market

turn depreciates the local currency. With the

prefer to stay away from risky investment

government asleep, growth has slumped and

which has significantly affected the portfolio

investors sentiments is at its lowest.

investment in India.

Since India is the major importer of oil which

As any outward flow of currency or decrease

consumes the largest part of FOREX reserves, a

in investment will put a downward pressure on

fall in rupee has bound to offset the decrease in

Exchange rate

the international prices of imported commodities

It is a known factor that deficit countries need

like oil which is adding the overall pressure on

capital flow whereas surplus countries generate

domestic inflation leads to an ultimate effect of

capital outflow. Here India capital account

increase in prices of final consumer goods which

comes into the picture which is directly

will decrease the purchasing power of consumer

impacted by the global market investors. In

and hence might pushed up the inflation. With

2008 India had a net outflow of 14 Bn $ of

this there is an increase in the imports bill of


petroleum crude and products have declined in

depreciated from 49 levels to 60 against dollar,

international currency as compare to the year

such a volatility of currency is a cause of


concern for

Also, the rupee depreciation has burden on the

the transaction risk. There is an increasing

central government in the form of FISCAL

pressure on RBI to decrease the policy rate as

SLIPPAGE due to the hike in the prices of

there is slowdown in growth due to which

imported goods and items which might warrant

foreign investors tends to stay away from

for a higher subsidy provision to be made for all

investing as they generally get attracted by

the imported consumer commodities.

higher real interest rates which further affects

With respect to rupee depreciation we have some

the Capital account flow of India and puts a

more factors that have pushed INR into the well.

depreciation pressure on Indian currency.

Continued global uncertainty is one of them

Not only the interest rate differences but there

which have adversely impacted the domestic

are also some key policy reforms lack of which

factors (Current and capital account etc) and have

DTC (Direct Tax Code), GST (Goods and

become the major cause of rupee depreciation due

Service Tax) have been in the pipeline for the

institutional investors where INR

foreign investors as its increases

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Page 6

years. GAAR, a retrospective tax law has already

contribution in the fall of rupee. With this

earned lot of flake from the business community

supportive act of RBI depreciation of rupee

lack of which the

can be controlled up to some extent.

investor’s sentiment are

further being negative over the Indian Economy. A Gloomy part of Rupee Depreciation: EXPORTERS




Recent data shown RBI has indeed intervene by selling the foreign currency reserve in



support of rupee.

depreciation is that when a currency depreciates, exporters make profits as they get more of the local currency for every unit of foreign currency though the quantum of trade remains unchanged. NRIs are also taking the leverage of the falling of rupee by resorting to borrowing funds in India at cheaper interest rates to make investments in the

In such situation, FDI can become a important

country and take advantage of the interest rate

factor as a favour of the long term capital flow



With all this negative aspects of rupee

ment in a project will generate cash in econ-

depreciation there can be a rope that can

omy. In concern of which government should

pull the INR from the “well” of Depreciation.

take some measures to take FDI and create a

1. Since rupee is Semi-convertible currency RBI intervention can reduce this speculation volatility for which measures takes central bank can stabilize







depreciation RBI can sell forex reserves leading to demand for rupee and putting a curve on trading in rupee forward which is once cancelled could not be bought again by the exporters and

respect to CAD as these FDIs invest-

healthy environment for healthy growth. Moreover RBI can also increase the FII limit in investment or Corporate debt instrument and can also invite long term FDI debt funds in infrastructure sector the ceiling the external commercial

borrowing can be enhanced will

allow more ECB in dollar at least cost which would help in sustaining in external funds.

not able to rebooked the forward again at the better







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Page 7

Derivatives – A synonym for Gambling? "Derivatives are financial weapons of

derivative markets ,there is no trading of the

mass destruction." - Warren Buffett

asset, thus only money exchanges hands

We are all aware of the chemicals which were

either immediately or on an agreed date in the

used by the Germans to kill the French and


Algerian troops, thereby initiating the modern


warfare using chemicals for mass destruction,

instruments; Options, Forward Contracts,

but Warren Buffett has stumped us, when he

Future Contracts, Swaps and not to forget the

talks about ‘Derivatives’ being the most


modern financial weapon of destruction. He

combination of forwards or swaps with

refers to derivatives as ‘time bombs’ waiting

options called “swaptions”.

to explode, for both the people dealing with

An option is a contract between two parties

them and the economic system.

that gives the buyer the right but not

Let’s first delve into the lesser known

obligation to buy or sell something at a later

intricacies of Derivatives. We know that

date at a price agreed upon. The buyer buys

Derivatives are financial instruments whose

an option and pays the seller a premium-

returns are ‘derived’ from the performance of

which is the price of the option. The seller is




Derivatives also serve a very impo rt ant

purpo se,


mitigating financial risk. By using derivatives, individuals or companies can transfer their










willing to sell or buy according to “Returns of derivatives are derived from the performance of other financial instruments ”

risk to other parties who have opposite risks or have risks that offset or want to assume risk. The Spot Market is where when the contract


is exercised, the money or the asset or both exchange





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Page 8

the terms of the contract when the buyer so

used to mitigate foreign exchange risks. An


example of currency swap is as follows:

A forward contract is a contract between two

Company X is doing business in India and it

parties to buy or sell something at a later date at a


price agreed upon on the day the contract is

bondholders . Other company Y is doing busi-

made. The difference between Option and

ness in Europe. It has issued bond of $ 15

Forward Contract is that both the parties incur

Million Euros. Now, both the companies

obligation to honor the contract. There is no

agreed for exchanging the principle and interest

corporate body which facilitates trading of

of both bonds. Company A will get $ 15 million

Forward Contracts, unlike options markets. Thus,

Euros Bonds with

forward contracts are traded over the counter

Company B will get Rs 20 million bond for


exchanging his principle and interest.

A futures contract is also a contract between two

Now that we have covered the bare-minimum

parties to buy or sell something at a later date at a

basics of what Derivatives are, let’s analyze

price agreed upon on the day the contract is

why Warren Buffett calls it a ‘time bomb’.

made. Unlike Forward Markets, trading of

According to Berkshire Hathaway’s annual

Futures is on a Futures Exchange and is subject to

report, Buffett is of the opinion that the prices


settlement procedure. Thus we can safely say

of the assets are tied to many variables and thus

that Forward Contract trading is much riskier than

poses great risks. Over and above that

Future Contract trading. This gives us the logical

performance of derivatives are tied to the

answer behind the price discovery of the

performance of these assets! More than

underlying asset on spot markets. Thus trading on

anything, it sounds highly confusing and very

forward market assumes the price of the asset as

risky. Derivative contracts run for many years,

the same from the futures market.

so much as 20 or more, thus the value of the

Swap is a contract between two parties who swap

variables to which the value of the contract is

the cash flows. The most commonly used swap is

attached to is under duress.

currency swap. In this case the two countries

Among other problems, derivatives exacerbate

enter the contract and exchange the principal and

trouble that a company has run into for no

interest of loan at its present value. This swap is

related reasons. This pile-on effect occurs

issued bond of Rs 20 Million to

its interest payment and

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Page 9

because most of the derivatives contract requires that a company going through a credit downgrade immediately





counter-parties. This is more like the insult to injury effect! This would more likely push the company to spiral down into the liquidation of the company. Although derivatives is useful to hedge against any type of risk, and mitigate interest-rate risks, Buffett still feels that there is a lynchpin, when pulled would send the world for a spin. Thus the question arises, does trading in derivatives tantamount to Gambling ?

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Page 10

Mergers and Acquisitions- Boon or Curse In the corporate world, bigger is often better.

record merger volume -more than $3,800

When it comes to legendary, industry-

billions - but also a merger market with

changing companies (think

unprecedented breadth, across geographies

Microsoft), the

more grandiose plans win out. We tend to

and industries. M&A

think the same way with mergers and

current merger cycle differ in significant ways

acquisitions. Some mergers are successful, so

from those of the 1990s, and this probably

successful, in fact, that we can’t remember a

explains why so much value has recently been

time when the two companies were distinct.

created. Specifically, this current merger

Where would Disney be without Pixar, or J.P.


Morgan without Chase?

consolidation with significant potential for

However, many mergers fall flat on their

cost synergies. The use by



existing cash and borrowed money (after-tax

company goes bankrupt, executives are fired,

cost) to purchase the (relatively higher cost)

and in some cases, the merged companies

equity of acquired companies. Much lower

disband in a sort of corporate divorce. For

acquisition premiums being initially paid.

whatever the reason, there doesn’t seem to be

Mergers and acquisitions can result in new

a magic trick to corporate mergers. Mergers

organizations whose financial and strategic












acquirers of


without the proper strategy, intuition,


transactions in the


mergers, can get, well, ugly.

“Mergers are risky and with proper strategy, intuition and knowledge”

For years, academic studies maintained merg-


ers and acquisition (M&A) deals destroyed







businesses around the globe bought (and therefore sold) more companies for more money than ever. It was not just a year of

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Page 11

Conglomerate merger:- This occurs when two companies in unrelated industries combine, such as where an electronics company joins with an insurance company.

Some successful mergers are highlighted below: Disney-Pixar -The merger was a success after the movies that Disney and Pixar have put out since: “WALL-E,” “Up,” and “Bolt.” Pixar has plans for twice-yearly films, unthinkable before the merger, and has certainly gained the expert options are much improved. They are driven by



adver t is ing,





from Disney when mar ket ing


comes to

p lugs,


barriers to growth, which make M&As a valuable

merchandising. When it comes to marketing to

tool by which companies can quickly attempt to

children, no one does it better than Disney.

increase revenue.

Even pre-merger cartoon “Cars” got the Disney

Depending on the intent of the combination, there are three common ways in which businesses get together so as to obtain advantages in their markets. They are: 

Vertical merger:-This occurs when a company combines with a supplier or customer. An example is when a wholesaler combines with retailers.








merchandising amongst 4 year old boys (just ask my nephew). Exxon-Mobil-




strongest leader in the oil market, with a huge hold on the international market and dramatic earnings. In 2008, ExxonMobil occupied all ten spots in the “Top Ten Corporate Quarterly Earnings” (earning more than $11 billion in one

Horizontal merger:- This occurs when two

quarter) and it remains one of the world’s

companies in a similar business combine.

largest publicly held company (second only to

An example is the combining of two



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Page 12

A major failures in mergers was Sprint/Nextel when in 2005, another major communication merger

occurred, this time between Sprint and

Nextel Communications. These two companies believed that merging opposite ends of a market’s spectrum ho me



ser vice


fro m

phones S pr int ,


and a nd


from Nextel – would create one big happy communication family (for only $35 billion). But the family did not stay together long; soon after the merger, Nextel executives and managers left the new company in droves, claiming that the two cultures could not get along. And at the same time, the economy started to take a turn for the worse, and customers (private and business alike) expected more and more from their providers. Competition from AT&T, Verizon, and the iPhone drove down sales, and Sprint/Nextel began lay-offs. Its stocks plummeted, and for all those involved, the merger clearly failed.

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Page 13

The economic crisis in Cyprus-what is in store for it in future? Introduction


Cyprus is a tiny nation of only about a

regulations and its unreasonable appetite for

million people. Its gross domestic product per

risk. The Cypriot banking system is infamous

capita which averages around $30,000 puts it

for being an offshore money laundering arm

among the richest nations in the world. The

of many rich Russian oligarchs. These

economy of Cyprus was declared as a high

Russians used to pour money into the

income economy by World Bank and it was

country’s banking system to evade taxes and



the banks attracted by higher interest rate

economies by the International Monetary

invested money on Greek government bonds

Fund in 2001. But this tiny island nation has

to a large extent. When Greek sovereign

taken the center stage of all economic

bonds collapsed in value the Cypriot banks

discussions at present. This is because it is

suddenly found a hole in their balance sheets.



Because of the large scale of the problem,

grappling with financial problems and could

Cypriot government was unable to rescue the

be the starting point of yet another financial

banks and turned to its European partners for


a bailout.






zone economy which







How the crisis took shape? Like many other European countries Cyprus has a huge debt problem. But Cyprus has put all its eggs in the banking

“Because of the large scale of the problem, Cypriot government was unable to rescue the banks”

industry. It has a very large banking system compared to its economy with total assets of 896% of GDP as in 2010. Even if one excludes the overseas operations of the domestically owned banks the size of


the banking system still exceeds seven times the GDP of the country. The core problem in

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Page 14

country because of its lesser mobility.

Cyprus’s plea for bailout The “troika” ultimately agreed to a bailout

Implications of the crisis

proposal but with a condition that roughly 6

Since banking sector plays a vital role in

billion euros of the total 16 billion euros would be

Cyprus’s economy contributing about 9% to

paid by the depositors. This seemed to be a

the GDP and accounting for 5.1% of jobs the

terrible precedent and faced resistance from

fallout of this sector will give a heavy blow to

everyone including officials of European Central

the country’s economy. Deficit targets as

Bank like its President Mario Draghi. He

negotiated between the Eurozone and Cyprus in

condemned this proposal to make “insured

a MOU imply that the country’s

depositors” pay for the bailout as unreasonable,

contract by nearly 8% in 2013-14.Apart from

since it was obvious that investors would pull


their money from any risky Eurozone bank

restructuring of the existing banking model, the

leading to a bigger economic debacle. Hence the

economy is likely to suffer from a ripple effect

plan was promptly revised.

across various sectors including tourism. But

According to the changed bailout agreements

this crisis has implications beyond its borders.




economy will




Laiki bank, one of the largest banks of Cyprus

The crisis of Cyprus is about more than just

has been terminated and the senior bondholders

Cyprus; it’s is about the Europe as a whole and

have to bear the losses. In approving a Euro10


billion package, European Union has called on

crisis may spill over to other European

Cyprus to arrange an additional Euro 6 billion to

countries like Malta and Luxemburg which like

cover the gap what

now appears to be

Cyprus have banking sectors several times

insufficient. So, Cyprus now needs to generate a

bigger than the economies. Big investors may

total of approximately 13 billion Euros. This is a

become more anxious of losing money and

huge amount for a country like Cyprus, even if it

might withdraw money from the second tier

goes after uninsured deposits in local banks. In

European banks. These countries might also

addition to this Cyprus has imposed strict capital

find it harder to get access to international bond

controls to prevent

markets. This can only lead to further troubles

a possible bank run.

Consequently, a Euro in a Cypriot bank is worth

Europe the rest of the world. The

for the Eurozone economies.

less than a euro in a bank of any other Eurozone

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Page 15

What are the options for Cyprus?

currency and still be in the Eurozone is still an

Generally when the banking system of a country

unsettled question. This is clearly a constraint








for Cyprus. On the other hand if Cyprus




chooses to drop out of the Eurozone, new

imported goods become very expensive. But there

pressure will be created on other troubled

is a positive side of this too. The country’s

economies like Greece or Spain to make a

tourism becomes cheaper, the exports become

similar move. This could strain the continent’s

more competitive and foreign investors get labors


of that country at a cheaper cost. This is exactly

unprecedented level and in that case survival of

what happened to Iceland. Iceland experienced a

Euro as a common currency will be under

banking collapse in 2008 during which its

threat. Thus we can see that there are not many

currency get

currency fell from 60 krona to the dollar to 120. It was followed by a terrible chain of events, but the collapse in the krona also led to surge in exports and tourism that kept unemployment contained. In case of Iceland a free floating






options for Cyprus and its economy will have to suffer the due consequences. For the rest of the world the real lesson to be learnt from this crisis is that: if you are a small country do not let your banking system grow so large.

currency acted as pressure valve for the troubled economy.





promising; but Cyprus cannot just walk in the same path. To experience the positive effects of weakening of currency it first needs to drop the Euro as its currency. But that is associated with a bigger cost of transition away from a more widely used currency. The geopolitical risk associated with the currency disintegration is also high. Being a member of the Eurozone its citizens can travel and work freely in any of the 27 countries in the zone. Whether a country can drop the common

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Page 16

EURO CRISIS MYTHS Of late, in the world of finance the

know the troubles so that it could provide

EUROZONE crisis has been creating quite

protection to the continent in the future.

a stir. It is basically a continuing affair where a certain number of economies are unable to repay their government debts without taking the help of third parties. This






consequence of a series complicated parameters. It

was inclusive of the

financial globalization, the provision of

Firstly, it is extremely insurmountable for the euro zone to act like the United States of Europe. In spite of this challenge, the euro





phenomenal speed. As a protection against the collapse of the weaker nations, there have been establishment of rescue funds

easy credit that stimulated the practices of

ranging up to a trillion dollars. Like that of

high risk lending and borrowing, the global

Federal Bank, the European central bank

slowdown, imbalances of trade, real estate

has been doing a lot to get over the crisis.

crises, and import and export fiscal issues.

To control the deficits, the euro nations have focused on stiff enforcements. They

So, this financial turmoil of Europe has the potential of having severe n drastic impact







according to which the financially stable

on the global front. So at this critical

nations will help and fund the

juncture there are a lot of questions that are popping up. Questions like whether Euro will survive, if the failure will result in a slowdown, if the

“it is extremely insurmountable for the euro zone to act like the United States of Europe�

impact will be on the upcoming United States presidential elections. For a better understanding of the crisis and to find answers to these questions it is necessary to clarify certain misnomers that


have arose from it. It is also essential to


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Page 17

economically weaker economies. Also, there are plans of providing deposit insurance that will be really beneficial in the long run. They are also provisions of executing cut backs and effective reforms to enhance productivity. So as per market standards, the Eurozone seems to be on track to the completion of aspects whose






remaining economies would compulsorily attempt to do anything and everything required to avoid a similar state by quickly cutting deficits and enhancing reforms. To add to it, the probability of fallout elsewhere would also speed up the banking and other financial combinations. Removal of Greece from the picture, would deliver the euro area


way stronger. Secondly, if at all, Greece is compelled to leave the monetary scenario, gradually the currency





consequences would be so dramatic that

The next topic at hand is the high hand of Germany. Already, it has given a huge chunk of rescue funds and helped many debtor nations. There are several reasons for

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Page 18

that in every debtor economy there is a political center. The avant-garde options have been rejected very firmly. Portugal and Ireland have remained confined to their commitments, Spain and Italy have managed to surpass with the help of taxes and market reforms. Greece tried to be different; nevertheless it had to reverse its course. They have realized the necessity of solidified support from political resources. Finally, the sharp turn downwards for Europe, has reduced exports and profits in USA and has left several sectors weak. There has been estimation that the euro collapse would provide a recession and starkly increase the unemployment rate by nine Germany being in such a powerful position.

percent pretty soon. Emerging nations led by

Germany’s export based economy barely

India and China have a sizeable chunk to

depends on euro. It has a competitive currency

themselves and will continue in the near

as per the other parts of the world as the rate of

future. Though this is slow, this is the only

the common currency is a living testimony to

thing that will be instrumental in keeping the

the weaker neighbors and the powerhouse of

global economy churning.

Germany. Moreover, German banks are

from the troubles of Europe, USA gains

exposed in poorer nations and hence its tax


payers would come to rescue in case of failure

responsible for capitalizing dollar in the

of Spain or Italy. Though nations like Finland


and Netherlands might have inhibitions, every


political leader in Germany is positively alive

muddling through will provide us and our

to the desired necessities.

election with protection from critical issues.











for of


higher Europe

A very fascinating issue regarding this crisis is

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Page 19

"Capital Market" Ultimate Place to make Money “The Globalization of the capital market is

a long run investment. The people who have

actually part of economic globalization. This will

knowledge about the Balance Sheet, cash flow

create a change in the entire world economy, not

as well as Ratio are able to analyze by their

just restricted to some fields in some countries�

knowledge and able to know about the

-- Richard A. "Dick" Grasso

financial position of the Company where it will

What is Capital Market? This question arrives in

be profitable or not to invest. The Company is

our mind. The definition of capital market is a

capable or not to declared dividend on the

market in which individuals and institutions trade

particular share or not. By this method any

financial securities. Organizations/institutions in

investor can able to make the profit through

the public and private sectors also often sell secu-

investing in the particular share.

rities on the capital markets in order to raise

Secondly, we can go through the Technical

funds. Thus, this type of market is composed of

Analysis by which any investor can predict the

both the primary and secondary markets.

future situation of the particular share where to

The simplest way to improve our financial

invest. The people who think that the particular

condition is to invest in the stock market. It is a

share has an immense growth and the stock is

place where the investor can raise their fund

on the way to bullish at that situation, the

through investing in the right fund.

investor is able to invest on the

There is a simple rule "think first

particular share. On the other

to choose a right share, and then

hand, the investor must sell

invest". There is no one in this world who can say the future situation of the stock market, but there are some simplest methods by which we can choose a right fund to invest. As my opinion, we can predict that which company's share is going to be profitable or not. First of all, we can go through the Fundamental Analysis. This analysis helps to the investor for


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their particular share on the bearish situation. The

Page 20

with the Bank's fixed deposit.

investor who has knowledge about the stop loss,

Last, but not the least, be Smart, to become a

they can apply the stop loss to save their loss.

good investor.

Finally, we can go through the Option where Put Option and Call Option are available. The investors who want to invest in the particular option they can make profit whatever they want. The Option is the instrument where the investor is able to invest their money and double it within a day. There is a magic tip for the Option "when any investor wants to buy the Call Option they can sell the Put Option without any doubt because the Put Option is the reverse of the Call Option. That means when the Call Option is in the Bullish position, the Call Option is in the Bearish position. The investor must choose the right Option to make money double.

There is some precaution to protect the loss in the Stock Market 

Investor must have knowledge about the Stock Market.

Think twice before invests.

Investor must have positive mind.

The investors must think about the Stop Loss.

There are some software by which any investor can invest in the right share.

Analyze the position of the share market through the economy of the country.

Don't compare the Stock Market investment

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Hedge Funds: The future of Indian capital markets Introduction: Hedge funds are a portfolio of

strategies which have been revealed by some

funds which uses different strategies to maximize

of the successful fund managers in the Wall

the return. Hedge funds are high risk, high return


investment vehicles. They are just like mutual

Long/Short strategy: In this strategy, the fund

funds; they pool the money taken from the

manager will maintain both long and short

investors and invest in a portfolio of funds which

positions in his portfolio. The stocks which he

they seem to be profitable. Initially, hedging had

thinks as undervalued and would have scope to

been evolved as the technique to protect the

rise in the future will be taken for long position.

securities against the price variations of different

Similarly, the stocks which he assumes as

securities due to volatility in the markets. Hedge

overvalued and would fall in the near future will

funds are different from mutual funds in the way

be taken for short positions. Thus, his portfolio

they use different types of strategies which we

contains both long and short positions (Need

will see below.

not necessarily to be equal in amounts of both

In mutual funds there won’t be any option for

short and long positions).

going short. But, in hedge funds, fund managers have the option to go short on some securities in their portfolios. They use different strategies and pool the stocks accordingly. Mutual funds

Market Neutral strategy: In “success of hedge funds is mostly assigned to the manager of those funds”

this strategy, the main objective of the fund manager is to

are highly regulated ones where as hedge funds are very least regulated ones. Strategies in Hedge funds: Most of the hedge funds managers won’t reveal their strategies to the outsiders to maintain their competitive advantage. Hence, the success of hedge funds is mostly assigned to the manager of


those funds. The following are some of the

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Page 22

reduce the market exposure on the portfolio. This

to be bought. These securities need to be held

could be done by maintaining an equal amount of

until the inefficiencies have been corrected.

long and short positions in his portfolio. In his portfolio, he needs to hold 50% short positions and 50% long positions which implies that the amount to be invested in long positions should be equal to the amount equal to the short positions. Hence, either way the market moves, the net exposure of the market on the overall portfolio will be negligible.

Event driven strategies: These strategies are widely used ones during the times of certain events like Mergers and acquisitions. During the times of M&A,

suppose, if company

‘A’ acquires a company ‘B’, usually, the share price of company ‘A’ will go down and share price of the company ‘B’ will go up. Hence, most hedge fund

managers will buy the

Paris trading: This is the most famous hedge

company B shares and sell company ‘A’ shares.

fund strategy which capitalizes on the market

Thus, they could get higher returns.

inefficiency. Suppose, consider two securities or two indices which shows a near to 1 correlation in their movements. Then, the ratio of their share prices over a period of time in the history gives a constant value. But, due to market inefficiencies, this may not occur at each and every moment of time during the trades in the stock markets. Observing this, the hedge fund managers buys the

Mathematical aspects of Hedge funds: Hedge fund managers should be exceptionally good at mathematics. Even though strategies vary across different fund houses, the usage of statistical tools is almost same in all Hedge fund companies. Usually, they use statistical tools like SPSS, R programming, MATLAB etc.,

stock present in the numerator and sells the stock

The analysis of results is relatively complex in

present in the denominator , if the ratio found to


be less than the constant value which they got due

investment vehicles like mutual funds because

to past observations. Similarly, if the ratio is

hedge funds yields asymmetric expected results.

found greater than the historical constant, it

Performance returns: There are two kinds of

implies that the share corresponding to the price

performance returns:

present in the numerator is trading at higher price and the share present in the denominator of the ratio is trading at a lower price. Hence, numerator shares need to be sold and the denominator shares






Absolute returns: This gives an idea on whether the fund is high risk, high return or low risk, low return and informs investor to make a decision regarding where this fund can be

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Page 23

substituted either in fixed income segment or in

probability for the hedge funds to yield highly

equity segment.

negative results which would be very higher

Relative returns: This compares the hedge funds

when compared to other investment vehicles.

to other benchmark indices and informs investor on the performance of this hedge fund Vis-Ă -vis the benchmark index. This informs the investor to choose better investing vehicle. Standard deviation: For most investments, we calculate the risk by using the standard deviation as they follow normal distribution. But, in the case of hedge funds, due to asymmetric expected returns, the calculation of standard deviation will be complex. If the calculation is done simply as we would do for a normal distribution, it could cover more risk inherently present in the hedge funds. Value-at-risk (VAR): VAR tells us the amount an investor going to lose in the extreme worst case (usually, it would be the highest amount that the investor is going to lose with 5% probability). That calculation is easy considering the normal distribution funds like mutual funds or other investment vehicles. But, in case of Hedge funds,


due to asymmetry in returns, the calculation of VAR is also complex. Skewness: Skewness is a measure of asymmetry of returns.

A skewness of approximately zero

indicates normal distribution of expected results. But, Hedge funds shows negative skewness which implies that there is little amount of

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Bank, Centurion Bank, Bank of Punjab and

into banking business in the early twenties and

IndusInd Bank to setup banks in India. Many

grew during the nationalist sentiment and freedom


movement in the country. During this time, major

institutions of the country.

banks were concentrated in the hands of few

IInd Phase (2004to2010)

business houses. To channelize the bank funds

Although the

to the few neglected sectors; in the year 1969, 14

Generation Private

banks nationalized followed by another 6 in the

adequate, the episode of Global Trust Bank

year 1980. These initiatives marked a paradigm

sent alarming signs to the banking industry.

shift in branch expansion and credit delivery

The regulator was more cautious and

mechanism thereby paving way to Mass Banking

judicious while allowing licenses to new

from Class Banking.

players and also monitoring the performance



Banking industry was dominated

of the existing players. In this backdrop, RBI





gave permission only to Kotak Mahindra

pre-reform era and majority of their operations

Bank and Yes Bank. The new private sector

including pricing of products, were governed by

banks which initially required entry level

the Reserve Bank of India.

capital of Rs.200 crores was decided to be

To instill greater competition in the banking

increased to Rs.300 crores within three years.






performance Sector



of the New Banks


system and to enhance the productivity & competence further, RBI adopted a liberalized policy and allowed Private players to enter into banking in the post reforms era. These developments can be classified into three important phases. Ist Phase (1993to2003) RBI granted licenses to few banks like ICICI


Bank, UTI Bank (now Axis Bank), HDFC Bank, Global Trust Bank, Times Bank, IDBI

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Large industrial houses were not permitted to

Cons: The draft requires new banks to ensure

promote new banks but individual companies

the same priority sector lending targets which

which were directly or indirectly related to large

The existing domestic banks have to follow-

industrial houses were allowed to own 10% of

40 percent of their loans should go to rural,

equity, without any controlling interest. RBI

small and medium enterprises, and they

permitted licenses to 10 New Private sector

should open at least 25 percent of their

Banks since 1993 of which 4 were promoted by

branches in rural areas - villages with a

financial institutions and remaining 6 by indi-

population of less than 10,000. They should get

vidual banking


listed on stock exchange within two years of


obtaining their licenses. The purpose behind


banks which were promoted

Ironically, by

either failed or merged with other banks.

setting up new banks is to promote greater


financial inclusion but enforcing the norms set

The Finance Minister announced in the Budget

for old banks on them

2010 that the RBI was considering some




It is evident that a majority of NBFCs are

sector, including NBFCs like Reliance Capital,

backed by large corporate entities showing

Tata Capital, Aditya Birla Financial Services with

keen interest



lucrative and a valuable channel to mobilize

improve access to banking

low cost funds to fund their business interests.




coverage and to





will not serve the

in banking as this segment is


The positive aspect of NBFCs to become

Pros: The main idea behind the Non-operative




institutions to banks, focusing on the niches

hold the bank and other financial services of a

that are neglected by the banking channel in a

group, is to segregate the financial services of the

way promoting financial inclusion.

group-which are over seen by regulators and the

The entry of Private Sector Banks forced

remaining other activities. The NOHC would

the PSBs to pay more attention on customer

hold at least 40 percent of the bank's paid-up

service to sustain and grow in the aggressive

capital with a 5-yearlock-inperiod.










However, PSBs are forced to

believe these steps will attract only serious

function in uneven level playing field since they

long-term players.






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element and social cause. In this case, opening of

1000 crores. Real estate exposure in terms of

new banks may lead to further drop in

assets should not be more than 10% of the

clientele base (high-value) and market share of

total assets of the group. The control and


ownership of the real estate arm should be

The Road Ahead

separated from that of the financial services







applicable now, the new private sector banks are

business. No dilution of promoter’s stake should be allowed for the initial 10 years.

expected to meet priority sector lending target as applicable






expansion criteria. The most significant question is–how are the new banks are going to carry out the


branch expansion and inclusive

growth when the performance of the existing private sector banks itself is far from satisfactory. Few private banks are contemplating to achieve the task by adopting the strategy of Branchless Banking through Business Facilitator (BF)/ Business





business model (BC/BF) can be easily replicated by PSBs since these banks are equipped with Core Banking, which is a requirement for Branchless Banking. To bring the new system into place, the regulator should focus his attention on the following important aspects to ensure the solidity of financial system and to guard the interest of the public at large A decent track record of



least 10 years in the financial services business for Industrial Houses to be allowed. New players would start operations with minimum capital of

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Trade Deficit and its implications on macro economy Whenever I pore over national dailies of our

Why our economy is afflicted with trade

nation, there used to be a lot of brouhaha over the


trade deficit of ours. That insinuates that trade deficit is of huge importance to us. But instead of forging measures to rein in trade deficit, it is ostensible that people responsible for that task are digressing for their own excuses. If we visit the website of Ministry of Commerce to get the statistics of trade, a pall of tantrums would be there. Our kind ministry has not even made website operational!!! Now what else can we

As per definition goes it due to the excess of imports over exports of a country. But the moot question which arises here is that why the burgeoning trade deficit is not tamed by our government. If we took a insight into this matter we would find that our manufacturing sector (IIP) is in bleak form from past one year. No growth in capital goods and dud investment.

expect from the Diaspora which has its task cut out. Recent (Current account deficit) CAD figures for December quarter are out. The stupefying finding in that release was a whopping CAD of 6.7% which is all time high. Resurging trade deficit and widening gold import are wreaking havoc on worsening CAD position. This fiasco in macro-economy bells death knell

“trade deficit is due to the excess of imports over exports of a country”

for our economy. If we can’t arrest burgeoning CAD, it will cause wider implications for our mounting external debt. Yawning external debt is already at an alarming level of 8.9% of GDP. It is pegged at $376 billion. Hence it will be ill afforded to finance our CAD through external borrowings.


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Another reason is our huge appetite for yellow metal. The import duty paid on gold is causing cascading





According to World Gold Council, India holds the top rung position for demand of gold.

Source: Ministry of petroleum and Natural Gas Depreciation of rupee is one of the worrisome concerns which create ripples in our trade balances. Lack of political will is also a major concern which can be factored in. Ultimately, government has all the vested powers to clear this Source:


The import of crude oil is leading the pack. Import of crude oil is the biggest reason for trade imbalance. It is already creating far-reaching catastrophic consequences in our economy.

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The unbridled trade deficit is adding to worsening

Political will has to be instilled in the modus

current account deficit. Due to this our Balance of

operandi of government. And most important,

Payment is getting badly affected.

we need to boost our exports to recuperate our trade with other countries. Government can make changes in their sophomoric policies to induce small scale industries to scale up their production.

Source: RBI Silver lining or panacea


Consumption of crude oil cannot be stopped as it is vital for our industries and transport. But cer-

Trade policy with other nations can be made

tainly we can cap this yawning consumption by

comprehensive to soothe trade imbalances. For

using it judiciously. Use of renewable energy

example, China is the biggest manufacturing

sources must be heavily promoted. Mounting sub-

exporter in the world. India must also put in

sidies on fuel should be tamed down.

place its abundant resources to leverage them. Anti dumping rules must be strengthened to in-

Excessive import of yellow metal has to be arrested. Government can impose higher duty to divert the demand of gold. Better small savings scheme and mutual funds or debt funds can also attract investors towards them.

crease competition in market. WTO negotiations are indispensable for our nascent economy. As we are a fledgling economy, we need selective concessions in our trade

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tariffs to support our economy. Special trade status such as the Most Favored Nation (MFN) provisions a streamlined process to increase one’s exports. In a nutshell if above slated measures are taken into consideration, then we can dream of a India which is free from trade deficit. Specter of twin deficits i.e. fiscal deficit and current account deficit can be nipped in the bud itself. I dream of our Bharat turning into Golden Sparrow of the yore. Source:


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Ponzi Schemes and its Effect on the Developed World Ponzi Scheme and its Origin:

cial Crisis. According to a study by Bank for

Ponzi Scheme is a fraud scheme that was started

International Settlements (BIS), the combined

by Charles Ponzi in the year 1920. In this scheme

debt of government, private households and

investors are paid returns from their own money

nonfinancial companies in 18 countries of the

or money paid by the subsequent investors rather

OECD, increased from 160 percent of GDP

than the profit generated by the organization.

in1980 to 321 percent in 2010, leading to

Charles Ponzi started it as business that would

increase in Debt-GDP ratio. These economies

buy postal reply coupons in Italy and exchange

have borrowed intensely from the future to meet

them with stamps in the US. This was an

their current consumption, putting a pressure on

arbitrage business which took advantage of the

the next generations. This will also lead to a

price difference. Charles Ponzi attracted investors

slowdown in the growth of the economies. Thus

by promising them high returns but instead of

steps should be taken to achieve political and

investing their money in stamps, he used the

economic stability because another recession

money of subsequent investors to pay high

can start anytime.

returns to the previous investors. This resulted in

Apart from debt, the Ponzi Scheme in the

extraction of huge amounts of profits, investors lost around USD 20 million (approximately USD 225 million) by the time scheme collapsed. The second-biggest Ponzi Scheme was

developed also exacerbated by “In Ponzi scheme investors are paid returns from their own money or money paid by the subsequent investors rather than the profit generated by the organization�

hidden liabilities of government and companies. It is the younger generation that pays for the

done by Bernard Mad off, a Hedge Fund Manager in New York. This resulted in losses of USD 20 billion in 2008. Currently, the developed economies are facing the effect of Ponzi Scheme. Ponzi Schemes in the Developed World: The Developed Nations of the World are in huge public and private debt due to the Global Finan-


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Page 33

older generation which is mainly due to increase

need to take steps to reduce the declining

in life expectancy rates in the developed world.

labor. Efforts should be taken to increase

Steps that the Developed World should take to

participation of elder generation in the workforce, increasing women participation

Overcome Ponzi Scheme: There are some steps that the Developed World



can take to reduce debt, increase GDP and end

contribute to larger working population.

the era of Ponzi Schemes.

Development of Immigration Policy: These developed

Elimination of Debt: It is important to finish the existing debt in the economies. Most of the debts that exist will not be paid for and there will be defaults in the future. Debt can be managed through write-offs, restructuring, increase in taxes, and inflation. Though this will result in losses for creditors and holders of financial wealth and higher taxes for tax payers, it will also help in ending existing debt in the economies. Reduction




Government should raise the retirement age, reduce social-insurance payments and manage health care systems for greater efficiency. These measures can help in reducing government spending on social welfare benefits. Increase











immigrants. The aim should be encouraging well educated immigrants from outside. Such immigrants will contribute to economic growth and development of the nation. Thus countries need to develop smart immigration policies. Investment


Education: Investment in

education can lead to growth in per capital GDP of the country. Developed nations should focus on





improving the quality of teaching. Government should also support bright and intelligent students





entrepreneurship. Government should invest in Universities and ensure that topics related to future growth and development are taught in the


Government can be made more efficient by making the social welfare system more efficient, reducing the number of public employees as a percentage of total population. New entrants must be encouraged to increase competition in the economies

Universities. Reinvestment in Assets: There is a need for reinvestment in public infrastructure and public assets. Airports, railways systems, highway networks






modernized. Government should also involve private sector in these activities as it will

Manage Labor Scarcity: Developed nations

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Page 34

improve strategic planning and governance,

ratio decreases in the developed nations will


they prosper.


prioritization Government




should also





encourage private

investment Increase in Raw-Material Efficiency: Business should aim at increasing production efficiency of supply chain. Companies should invest in material-efficient products to meet the changing consumer needs. Government should encourage development of policies for efficient technology. Global Cooperation: Though the competition will increase in the World, it is important that the Countries must cooperate only then can the problems be solved, else it will result in Beggar-thy-Neighbor leading to slower economic growth. Emerging economies should focus more on domestic consumption as compared to export based growth. Innovation: Developed world should invest in product ive




technologists to innovate and entrepreneurs to start new business. Many government policies are designed to protect traditional industries which


inhibit innovation. Thus antitrust policies should be developed to encourage innovation to achieve economic growth. Thus the fraudulent Ponzi Scheme can be put to an end only when society, government and companies cooperate. Only when the debt-GDP

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BC MODEL – a revolution in banking service is the pathway to promote financial inclusion in India The reach of banking and other financial

providing various financial and banking

services were very limited to the mass

services. These intermediaries are known as

population of India as in spite of so many


years after independence of our country half

Facilitator’s. And RBI has defined the

of our population is unbanked. Although

parameters and criteria for all those entities

many programs like Co-operative Movement,

who can become BC.








Nationalization of banks, RRBs, Self Help Groups






Government of India and other government bodies like RBI, NABARD etc. to include the financially excluded population but these programs were not that of huge success in ground level due to many constraints to cover all sections of population.


ensuring greater financial inclusion and increasing the outreach of the banking sector in India the BC model


The different entities who are working as BC’s of various banks are in proper legal agreement with the banks. And they cannot offer any new product or services until they have taken the prior permission of banks. And for each transactions or opening of any new accounts or for any other services they provide to the customers on behalf of the bank

“entities who are working as BC’s of various banks are in proper legal agreement with the banks”

Thus with the primary objective of


they are working with they receive




commission for that. And the banks will be fully

has been implemented. In the year 2006





Correspondent (BC) Model in which NonGovernmental




Groups (NGOs/ SHGs), Micro Finance Institutions






intermediaries between the banks and the financially excluded population of India for





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responsible for all the activities of the BC and

sectors among the BPL i.e. Below Poverty

their retail outlet i.e., Customer Service Point

Line people. Even the KYC norms were


simplified to enhance the outreach of banking







representative of banks who provides banking

in rural sectors.

services through use of ICT based solutions in

BC offer its clients a mix portfolio of different

his own or nearby villages. And the banks


give remuneration and or transaction based

micro-loans, micro-savings, micro-insurance

commission to them against the service they

and micro-remittances services etc. The


different scope of activities that BC can offer

Figure1: BC Model

to its customers are strictly guided by RBI’s





notification and they include (i) disbursal of RBI also took several corrective measures to promote BC model by allowing banks and their respective BC’s to open No Frill Accounts to promote the drive of financial inclusion. The reason to promote No Frill Account was because those accounts could be opened with either zero or for a minimal balance requirement which was not present earlier. And thus it was easy for the banks to

small value credit, (ii) recovery of principal / collection of interest (iii) collection of small value deposits (iv) sale of micro insurance/ mutual fund products/ pension products/ other third party products and (v) receipt and delivery of small value remittances/ other payment





increasingly being recognized as the most suitable approach for achieving financial

open new account especially in the rural

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Page 37

inclusion in the long run as it allows banks to

the help State Level Bankers’ Committee’s

service customers and extend their geographic

i.e. (SLBCs).

reach at a much lower cost.

Figure 2: Various services offered by BC To further strengthen the pace of financial inclusion program in India in the year 2011 the Government of India in association with Indian


Association started the


And under this

scheme the banks were advised to draw up a road map to provide banking services in every village having a population more than 2000 by March 2012 either through brick and mortar





Correspondents. Thus 73000 villages were identified and allotted to various banks with

Initially several banks started pilot project to test the viability of BC model and gradually the pace and rate of expansions of Business Correspondents





Customer Service Provider increased to a greater extent with the usage of Information and Communication Technology i.e. ICT based solutions. Thus the customer provided with a Multi-application Smart Card, mobile phone enabled banking facilities, biometric ATMs, Internet Kiosks helped a lot to gather the

momentum of the financial inclusion

program in India. The Financial Inclusion Technology Fund is used for investing in

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Government’s decision to use BC Model in

(ICT) based solution for promoting financial

transferring monetary benefits of government

inclusion. Thus new technologies are invented

programs like NREGA, Social Security

especially for innovating new models and

Pensions etc. is also helping the model to gain

approach to mitigate the demand and supply

momentum. The recent tie up of direct

of banking services in India.

transfer of subsidies with the help of ADHAAR card i.e. a Unique Identification

Figure 3: BC using ICT based solutions

Figure 4: Growth Chart of BC Model released by RBI

Number with the help of BCs network also

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Page 39

shows that how effective and efficient BC

and why it can be used as a pathway to

Model has

promote financial inclusion in India.


in reality that


Government is using it for promoting its own programs. Thus BC Model has been a perfectly game changing model for reaching the financially excluded population of India. And the pace of growth of BC’s and their retail outlet i.e. CSP is really a positive sign for the growth story of financial coverage in India. The banks also actively participated for caring out new different strategies and plans for making the BC Model more effective in the ground level. And the latest data released by RBI can highlight the real success story of BC Model

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D.E. Shaw SIP Experience Hello,

Operations- Financial Reporting Team. The

My name is Ekta Singh and i come from city


of joy, Kolkata. I have done my graduation

statements for the hedge funds according to

from St. Xaviers College, Kolkata. I am also a


certified Company Secretary. I hold a work

Luxembourg GAAP, audit confirmations and

experience of two years with HSBC Global

interaction with our investors and auditors,

Resourcing and PriceWaterHouse Coopers

roll forwards, working on acrobat and PDF's,


Microsoft Outlook etc. Apart from the work ,










the team was highly skilled and set of I am fortunate enough to be a part of Money Matters Club. Here I was able to explore my

professionals who imparted us learning every single day.

passion for learning more through support from our mentors, faculties, teammates.

Being part of D.E Shaw didn't only gave me

Another major development for me in last one

exposure to various work fields but we also

year's time was cracking the best summer

had fun during our non-working hours as

internship programme (SIP) campus in D.E

company had highly equipped gym, regular

Shaw. The experience of SIP was amazing

yoga and aerobics classes, delicious food,

when it came to learning, team work,

gaming area, various sports and competitions.

showcasing my skills-sets, interaction with

I would like to express my gratitude towards

corporates and big companies like E&Y,

Money Matters Club which helped me getting

Blackstone, J.P Morgan, Silver Creek etc.

a wonderful industry experience by preparing us well in the field of finance well.

The selection process was too rigorous starting from written test, group discussions, panel interviews. D.E Shaw is an investment and software company incorporated in 1988. I got an


opportunity in working for the best team of D.E






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A former derivatives broker whose fraudulent, unauthorized speculative trading caused the spectacular collapse of Barings Bank, the United Kingdom's oldest investment bank lead to a loss of $ 1.4 billion in 1995 is ------------------------


Name the first Indian woman CEO of a Foreign Bank? He is the pioneer in mutual fund industry and often referred as the Father of Index Fund investing. He created the first S&P 500 Index fund. Identify this famous person? Who founded the famous Wall Street Journal? Name the person who introduced the 'Double Entry' book keeping concept? Who is known as the Father of modern Economics?


4. 5. 6. 7.

NASDAQ is acronym for

Answers 1. 2.

Nick leeson Tarini vaidya of KBC bank India and South Asia


John Bogle


Charles Dow and Edward Jones


Lucas Pacioli

6. 7.

Adam Smith National Association of Securities Dealers Automated Quotations

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The FInancial Bulletin,June 2013 edition