In operations management, “CAMELS” refers to a rating system used by bank supervisory authorities to assess the financial health of financial institutions, focusing on six key areas: Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. In India the banks supervisory authority is Reserve Bank of India.

C: The capital adequacy ratio (CAR) is a measure of how much capital a bank has available, reported as a percentage of a bank’s risk-weighted credit exposures. The purpose is to establish that banks have enough capital on reserve to handle a certain number of losses, before being at risk for becoming insolvent. For Indian banks, the Reserve Bank of India (RBI) mandates a Capital Adequacy Ratio (CAR) of at least 9% for scheduled commercial banks and 12% for public sector banks. 

A: Asset quality refers to the assessment of the credit risk associated with an asset, particularly in the context of bank loans and investments. It essentially evaluates how likely an asset is to generate the expected return and avoid losses. 

M: Bank management involves the strategic oversight and administration of all banking activities, encompassing areas like regulatory compliance, operational efficiency, risk management, customer service, and financial product development, all with the goal of maximizing profitability. 

E: Earning banks generally earn money by borrowing money from depositors and compensating them with a certain interest rate. The banks will lend the money out to borrowers, charging the borrowers a higher interest rate and profiting off the interest rate spread.

L & S: A bank’s liquidity & sensitivity refers to its ability to meet short-term obligations, while sensitivity to market risk refers to how its earnings and asset values change with market fluctuations, impacting its overall stability. 

CAMELS rating system is on a scale of one to five, with one being the best rating and five being the worst rating. One of the research projects titled “A Study of CAMELS Performance of Bank of Baroda and HDFC Bank” conducted by Kumar and Singh in 2023 examines into an analysis comparing two prominent banks, in India, namely Bank of Baroda and HDFC Bank. The study utilized the CAMEL’s framework to assess their performance. The Indian banking industry plays a fundamental role in the nation’s economic development and financial stability. Ensuring that the health and strength of the banks operating in this dynamic environment and market is of paramount importance. This research dives into the comprehensive assessment framework known as CAMEL’s model.

To analyse the performance and the reliability of the banking institutions operating within the Indian Banking Sector. The study employs a multi-layered approach, combing quantitative and qualitative methodologies to determine the strength of the weakness of the Banks. It examines the chief components of C.A.M.E.L.S and their impact on stability and resilience of bank, providing an understanding of the criteria used by investors and the regulatory authorities to evaluate the health of banking institutions. Through a review of Banks financial statements and empirical data, this research paper sheds light on the Indian Banking Industry which is continuously changing landscape. The research also tried to understand how effectively the CAMEL framework addresses the emerging challenges, potential risk, and vulnerabilities within the sector. Furthermore, this paper discussed the importance of CAMELS in assessments on decision-making processes of investors and bank management. Many Ratios metrics and analysis were made that will support the CAMEL’s model.

Bank of Baroda is India’s second largest public sector bank which  has not only established a strong presence domestically but also internationally. It was founded in 1908. BOB boasts a history filled with reliability, innovation, and customer focus. The bank offers a range of products and services to cater to individuals and businesses of all sizes. With a customer base exceeding 128 million worldwide and operations across 24 countries with over 100 branches and offices Bank of Baroda has positioned itself as a strong player. What distinguishes Bank of Baroda is its role in banking serving, over 70 million users through mobile banking. Bank of Baroda has gained the trust of families in India because of its financial performance, global presence, and dedication, to digital advancements.

HDFC Bank, the private sector bank, in India has a total business volume of over INR 25 trillion and a global customer base of more than 100 million. They have a network of ATMs with over 19,000 machines making it one of the largest in India. Additionally, HDFC Bank is at the forefront of mobile banking services. It serves than 50 million customers through their innovative mobile banking solutions. In terms of market capitalization, it holds the position among banks. With its reach and inventive solutions HDFC Bank continues to set standards for excellence in banking. This study aims to analyse the performance of two banks within their respective sectors: Bank of Baroda, a public sector bank and HDFC Bank, as a private sector bank. The analysis has utilized C.A.M.E.L.s model a research tool to evaluate the health of both organizations. The CAMELS model is widely used to evaluate the wellbeing of banks and credit unions.

Regulators rely on this model to assess the safety and stability of institutions by assigning ratings from 1 to 5 for each component. The Reserve Bank primarily supervise banking sector like a hawk in India. While India experienced some impact from the 2008 global financial crisis, the Reserve Bank of India (RBI) and the Indian government’s proactive measures helped mitigate its effects, preventing a full-blown crisis like in other countries.  A rating like CAMELS  helps regulators identify areas of concern and take actions for improvement. Ultimately the CAMELS model serves as a tool to ensure that institutions maintain capital effectively manage risks generate sustainable earnings and fulfil their obligations. Additionally, ratio analysis is employed alongside the CAMELS model to identify strengths and weaknesses, within organizations.

Based on CAMEL analysis, the best banks in India for 2025 are HDFC Bank, ICICI Bank, State Bank of India (SBI), Kotak Mahindra Bank, and Axis Bank. These banks are recognized for their strong financial stability, customer service, and range of banking services.

There are finfluencers (financial influencers) who influence people on social media platforms about which mutual fund to invest in, which stocks to buy, which IPO to buy, what’s the market trend etc. Finfluencers generating content on financial topics, are rapidly rising in popularity on social media. Many finfluencers earn a lot, even lakhs, by making videos on initial public offers and posting them on social media platforms. Most important fact is they are totally nobody. There is no reason to listen to them. They are just social media personality that give quotes, life lessons and business advice which they take from Google and based on which they give business advice. In short, they deceive their followers.

A finfluencer usually promotes a broking firm by adding a link to open an account. They get a commission for each account opened using that link; some even get a share of the firm’s earnings from these accounts.

In June 2024, the Securities and Exchange Board of India (Sebi) has taken a bold step by banning regulated entities from getting associated with unregistered finfluencers. This crackdown targets anyone who provides financial advice or makes claims about securities without Sebi’s registration. Earlier, Sebi had noted concerns about finfluencers promoting some of the IPOs falsely instead of objectively informing the investors of its merits and risks. People invest their hard-earned money into various financial products with having actual information. 

SEBI’S new regulations create a distinct separation between qualified financial advisors and unregulated online influencers. Regulated entities such as brokers, mutual fund houses, research analysts and financial advisors are now strictly prohibited association with unregistered finfluencers. This ban includes partnerships for marketing purposes, sharing client information, or receiving financial benefits from their activities. Sebi is also establishing a secure payment system for registered investment advisors (IAs) and research analysts (RAs) to collect fees from their clients. This ensures that investor payments are directed only to authorised professionals, making it easier for investors to distinguish between registered IAs/RAs and unregistered finfluencers.

Younger people are increasingly turning to content on platforms such as TikTok as they are more aware of their personal finances, with #fintok currently at 927.8 million views. The influencers often share their personal financial journeys, offer financial literacy education, and promote various financial products and services. They may collaborate with financial institutions, promote budgeting apps, or review investment options. Like other influencers, they can monetize their influence through sponsored content, affiliate marketing, and other means.

There is high appeal in financial information that comes in bitesize, light-hearted formats and Gen Z and millennials are turning to finfluencers to improve their financial education and boost financial literacy levels.

Sebi’s move addresses the troubling alliance between market intermediaries and shady influencers. ‘Finfluencers’ have been linked to discount brokers, driving up trading activity and often misleading investors with false profit claims on platforms like YouTube and Telegram.

Finfluencers have played an impactful role in spreading financial awareness and motivating investors to actively participate in the finance market. However, their activities remain unregulated, posing risks to investors. Some famous finfluencers are Shaunak Udupa who enjoys 150k subscribers, Rachana Ranade with 4 million subscribers, Anushka Rathod enjoys 17.3k subscribers, Sharan Hegde 1.1.k subscribers.  

Recently, the Securities and Exchange Board of India (SEBI) has taken a stern stance against a social media influencer, Mohammad Nasiruddin Ansari, widely known as ‘Baap of Chart.’ Recently, SEBI imposed a ban on Ansari from the securities market, accompanied by a substantial fine of Rs 17.2 crore.  Ansari is the sole proprietor of the firm Baap of Chart (BoC). He promoted himself as a stock market expert on various social media platforms and invited investors/ clients to enrol for various “educational courses” offered by him. According to SEBI’s order, Ansari marketed his stock recommendations as educational training, but he was trying to sell them. Ansari is a self-proclaimed investment expert who used to provide stock recommendations under the moniker ‘Baap of Chart’ through platforms like X, Telegram, and YouTube. However, his actions did not go unnoticed by SEBI. Along with his associate Rahul Rao Padamati and their company Golden Syndicate Ventures, Ansari has been barred by SEBI until further notice.

Market regulator Securities and Exchange Board of India has issued a draft circular in which it has asked companies that are coming out with a public issue to include audiovisual (AV) presentation of disclosures made in their offer documents for interested investors. In the draft circular dated March 19, the regulator said that the IPO’s AV presentation should start with a disclaimer that investors must not rely on any other content, such as those made by finfluencers, and that the lead managers of the issue be responsible for the content and information made available on the AV. Sebi said: investors are advised not to rely on any other document, content or information provided on the offer on the internet/online websites/social media platforms/micro-blogging platforms and by the finfluencers since the same is not approved/commissioned/paid by the company or its promoters/directors/KMP (key managerial personnel) in any manner.

By this move, SEBI wants to eliminate unregistered finfluencers providing illegal investment advice through social media channels. Restrictions have been imposed on intermediaries, such as brokers and mutual funds, from engaging unregistered finfluencers for product promotion. The rise of finfluencers signals that people have money to invest.

India is making serious efforts to make the circular economy a major tool for urban development. The circular economic system uses resources again and again, multiple times. Prime Minister Narendra Modi announced this decision in post-budget webinar speech, in 2023. The circular economy presents an economic approach focused on minimizing/eliminating wastage while promoting the optimal use or complete reuse of resources. India ranks seventh globally in Solid Waste Generation (SWG).
The present rate of SWG in India is 0.34 kg per capita per day, which is expected to increase to 0.7 kg per day by 2025. India will generate 165 million tonnes of waste by 2030.
Out of 8 million tonnes of plastic waste in the world’s oceans, the Meghna-Brahmaputra-Ganges River system dumps close to 73 thousand tons, making it the 6th most polluting river system contributing to marine plastic waste in the world. This is very shameful of our attitude.

The circular economy is a model of production and consumption, which involves sharing, leasing, reusing, repairing, renewing, and recycling existing materials and products as long as possible. In this way, the life cycle of products is extended.

Vermigold Ecotech is a cleantech waste management technology company. The company designs, develops and market innovative products for organic waste composting. The company was formed to specifically address the need for an innovative and technologically sound provider of Environmentally Sound Technologies (EST). Vermigold is an on-site biological recycling automation solution that blends superior vermicomposting biology with superior technology to allow end-users to collect organic material in a hassle-free and environmentally beneficial way. It is India’s only globally accredited waste treatment technology, indicating its pathbreaking system.

The FMCG leader Unilever has an ambition to create a waste-free world, amongst other targets, the company is committed to ensuring that their packaging is recyclable, reusable, or compostable by 2025.

At ITC, all Businesses Units are directed to ensure recycling of 100% waste generated. This not only conserves precious natural resources and energy but also prevents waste from reaching landfills, with all its attendant problems like health hazards, increase in Greenhouse Gas Emission (GHG), soil and ground water contamination, etc. Circular economy also creates significant employment opportunities for the marginalised sections of society. India is well on track to become the third-largest economy in the world. Prime Minister Narendra Modi has highlighted that AatmanirbharBharat, or ‘Self-Reliant India’, which is a launch pad that will put India on a high economic growth path that is inclusive and sustainable. With Self-Reliant India, the aim is to make the country and its citizens independent, and the vision is firmly rooted in sustainability

Indian fashion industry has also embraced the new sense with the principles of upcycling with a fresh vigour. Upcycling is also known as creative reuse. It is the process of transforming by-products, waste materials products into new materials or products identified to be of greater quality, such as artistic value or environmental value. For example, ecological fashion brand ‘Doodlage’ is India’s most famous eco-friendly clothes brand which asserts 100 per cent of its collection is upcycled, recycled, and manufactured with zero-waste. Bengaluru-based ethical fashion brand Gujarat-based label ‘RaasLeela’, runs business with all-women’s team. It makes products where every design, material and process are chosen thoughtfully keeping first the environment, process, and the maker in mind. The tagline of the business is “We are not a fashion brand! Fashion is a byproduct.”

Bagasse is the fibre that remains when sugarcane juice has been extracted. This fibre is then moulded into versatile and sturdy trays, cups, spoons, food packaging boxes, and other food packaging products through a high-pressure, high-heat process.

Furthermore, the circular economy is no longer a choice for India, rather it is has become a need of the hour. With a rising population, urbanization, environmental challenges, and international commitments, shifting towards a circular economy has become imperative for India. “Be true to yourself,” has been the guiding principle of the Modi government India development agenda. If India grows without following the principle of sustainability, then the growth would be pretentious for the sake of numbers only. Therefore, India’s economic development must align with the principles of circularity, eliminating waste and pollution, circulating products and materials (at their highest value), and regenerating nature.

As per recent data, the European Union produces more than 2.2 billion tonnes of waste every year. It is currently updating its legislation on waste management to promote a shift to a more sustainable model known as the circular economy. To reduce waste and its impact on the environment, the EU has adopted ambitious targets on recycling and landfill and is working on packaging waste. The goal is to promote the shift towards a more sustainable model.

 In 2022, EU exports of waste to non-EU countries amounted to 32.1 million tonnes. This was a slight decrease of 3% compared to 2021. Most of the waste exported outside the EU (55%) consists of ferrous metals waste (iron and steel), which mostly goes to Türkiye. EU exported a lot of paper waste as 15% to India.

A circular carbon economy is a framework for managing and reducing emissions. It is a closed loop system involving 4Rs: reduce, reuse, recycle, and remove. Saudi Arabia and Aramco have adopted the circular carbon economy framework to reduce their carbon footprints.

Carbon dioxide (CO2) performs a delicate life-sustaining function on Earth, but the dramatic increase in greenhouse gases since industrialization has emitted too much CO2 into our atmosphere. The circular carbon economy is an important concept toward managing the world’s excessive CO2 emissions. Road transport presently accounts for 12% of India’s energy-related CO2 emissions and is a key contributor to urban air pollution. As India seeks to meet the increasing demand for private mobility and the transport of goods, energy use and CO2 emissions from road transport could double by 2050.

In practice, circular economy implies reducing waste to a minimum. When a product reaches the end of its life, its materials are kept within the economy wherever possible thanks to recycling. These can be productively used again and again, thereby creating further value. It is a removal from the traditional, linear economic model, which is based on a take-make-consume-throw away pattern. This model relies on large quantities of cheap, easily accessible materials and energy.

The best part of this model is planned obsolescence, when a product has been designed to have a limited lifespan to encourage consumers to buy it again. The European Parliament has called for measures to tackle this practice. Many consumer electronics are designed to make it impossible to repair them or replace parts. Sometimes it is physically impossible because the product pieces are welded together to prevent replacement and the remains cannot be opened without breaking it. Some laptops, mobile phones and electric toothbrushes have lithium-ion batteries with a useful life of two or three years. These cannot be replaced by the owner of the device, who has no option but to buy a replacement. Also, some other examples are batteries, inkjet printers.

The circular economy is a system where materials never become waste. In the economy, products and materials are kept in circulation through processes like maintenance, reuse, refurbishment, remanufacture, recycling, and composting. This process helps to eliminate waste and pollution. Keep products and materials in use to regenerate natural systems.

In the current year 2024, India will host its 18th Lok Sabha election. Although the exact date of the election has not yet been announced, it is estimated that the General Elections of 2024 will take place in April and May.  On 1^st February 2024 Union Budget was presented by Finance Minister Nirmala Sitharaman. 

During an election year, the government does not present a full-fledged Budget for the whole year, instead the government prepares a short-term budget which is called vote on account. I will try to explain how vote on account is different than the Union Budget.

As per Article 116 of the Indian Constitution, a vote on account is an advance grant to the government from the Consolidated Fund of India to cover short-term expenditure such as salaries, pensions, debt servicing, and ongoing projects requirements until the new financial year begins. There is a Consolidated Fund of India, defined in Article 266 of the Indian Constitution, which stores all the revenue generated by the central government, including taxes, interest on loans, and a portion of state taxes.

Thus, an outgoing government seeks short-term permission from the Parliament to withdraw funds from the Consolidated Funds of India to spend that on expenditures and important government schemes for a few months until a new government is formed is called vote on account. The sum of this grant is 1/6th of the estimated expenditure for the whole year under various demands for grants. The vote-on-account is valid for two months usually.

Is vote on account passed every year?

A vote-on-account contains only the expenditure of the government’s budget while an Interim Budget is a complete set of accounts i.e. it includes both expenditure and receipts. Vote-on-account is passed every year and is used by both the regular and caretaker government. As per the Act, the Consolidated Fund will not to be withdrawn unless there is an exceptional situation.   Under the constitution, money cannot be withdrawn by the government from the Consolidated Fund of India unless it has been annexed by law.

During an outgoing government, a temporary budget is presented, or a vote on account is sought. The next government will be responsible for presenting the full budget. The vote on the account cannot impact the tax regime. Vote on account is the process of withdrawing money from the Consolidated Fund of India during that period, generally two months. A vote on account is a formality and does not require debate. The government seeks a vote on account for four months when elections are scheduled a few months into a new financial year.

As such, a vote on account is merely an interim authorization to spend money, as opposed to a full Budget that includes details of expenditures and receipts, including tax changes and government policies.

During election years, when elections are scheduled a few months into the new fiscal year, the government prefers to request a vote rather than present a full budget because it is unfair to deny the new forthcoming government the right to design its own budget for the rest of the year. The new government comes with its new fiscal plans and objectives. Vote on Account serves as an interim mechanism to ensure the unbroken flow of funds for essential government expenditures until a new government assumes office and presents a full-fledged budget. Please understand that the Vote on Account is narrower in scope. Therefore, we don’t find great changes in it.

Usually, the tax slabs are kept the same. It is tailored in limited framework and in smaller areas. The 2024 budget focuses on fiscal consolidation (a reduction in the underlying fiscal deficit), infrastructure, agriculture, green growth (natural assets continue to provide the resources and environmental benefits), and railways’ several initiatives. However, no changes were made in the income tax slabs, which was a disappointment to salaried individuals.

The foreign exchange market which are also known as forex, FX, or the currencies market is an over the counter (OTC) global marketplace. An over the counter (OTC) market is a decentralized market in which participants such as broker, dealer trade currencies, or other instruments without a central exchange.  While going on a trip abroad, one needs to have the currency of that country. For example, if you are traveling to Philippine, you need to carry Philippine Peso which is their currency, if you are travelling to New Zealand, you need to carry New Zealand Dollar.  

Participants in FX can buy, sell, exchange, and speculate on the relative exchange rates of various currency pairs. A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other.

Foreign exchange markets are made up of banks, Forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers, and investors.

Due to the absence of Security Exchange Board of India regulation, forex trading is illegal in India. Indian citizens are prohibited from trading in foreign currencies by RBI. It is challenging to control and regulate currency trading in India, but Hawala trading takes place every day on a large scale.  Hawala is an informal method of transferring money without any physical money moving. It is described as a money transfer without money movement, without any paperwork, questioning or responsibility.  It works purely on trust.

Let’s look at different types of foreign exchange markets:

1.  The Spot Market

In the spot market, transactions involving currency pairs take place. A currency pair is the quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. For example, if the quoted exchange rate for EUR/USD was $1.2456, then that is the spot rate. This happens impeccably and quickly. The transactions require instant payment at the prevailing exchange rate. A spot rate is the current price at which a particular currency can be purchased. The traders in the spot market are not subjected to the uncertainty of the market, which leads to an increased or decreased price between the buyer and seller settlement. The spot market consists of banks, forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers, and investors.

2.  Futures Market

The transactions in the futures market require future payment and distribution at an earlier agreed upon exchange rate which is known as the future rate. The transaction or agreement is more formal in nature which ensures that the terms of the transaction are set permanently which cannot be altered. Traders who conduct most of the transactions enjoy a consistent return on the assets. Regular traders prefer a future market transaction. Currency futures are an exchange-traded futures-contract that specify the price in one currency at which another currency can be bought or sold at a future date. Futures are done on an exchange, which is a party to the transaction. Currency futures contracts are legal binding and fellow parties who hold the contracts must deliver the currency amount on the specified delivery date. Another point to note is currency futures can be used to hedge (protect) volatility on price movements in currencies.

One party will agree to buy a certain amount of another currency at a set price at a specified time in the future. US dollars to euro futures are a popular futures contract and are a good example.

The first currency futures contract was created at the Chicago Mercantile Exchange (CME) in 1972 and it is the largest market for currency futures in the world today.

Currency futures contracts take place daily. This means traders are responsible for having enough capital in their account to cover the margins and losses which result after taking the position.

3.  Forward Market

The third type of foreign exchange market is the forward market where deals are like future market transactions. In this case, the parties will negotiate the terms of the transactions and the terms agreed-upon can be negotiated and altered as per the needs of the concerned parties. The forward market has higher flexibility as compared to the futures market. Forwards are executed between banks or between a bank and a customer. In the foreign exchange market, the forward price is derived from the interest rate differential between the two currencies, which is applied over the period from the transaction date to the settlement date of the contract.

Interbank forward foreign exchange markets are priced and executed as swaps. This means that currency A is purchased vs. currency B for delivery on the spot date at the spot rate in the market at the time the transaction is executed. At maturity, currency A is sold vs. currency B at the original spot rate plus or minus the forward points; this price is set when the swap is initiated.

The interbank market usually trades for straight dates, such as a week or a month from the spot date. Three- and six-month maturities are among the most common, while the market is less liquid beyond 12 months. Amounts are commonly $25 million or more and can range into the billions.

4.  Swap Market

When there is a concurrent borrowing and lending of two types of currencies between two investors, it is known as a swap transaction. Here, one investor borrows a currency and in turn, pays in the form of a second currency to the second investor. The transaction is done to pay off their obligations without having to deal with a foreign exchange risk.

The purpose of investing in a currency swap is to procure loans in foreign currency at favourable interest rates than borrowing directly from foreign market. During the financial crisis in 2008, the Federal Reserve (Central Banking system of the United States) allowed several developing countries that faced liquidity problems the option of a currency swaps for borrowing purposes. In a transaction arranged by investment banking firm, Salomon Brothers, the World Bank entered the very first currency swap in 1981 with IBM. IBM swapped German Deutsche marks and Swiss francs to the World Bank for U.S. dollars.2

Foreign currency swaps can be arranged for loans with maturities as long as 10 years. Currency swaps differ from interest rate swaps in that they can also involve principal exchanges.

The SAARC (South Asian Association for Regional Cooperation) currency swap facility came into operation on 15th November 2012. The RBI can offer a swap arrangement within the overall corpus of USD 2 billion. The swap drawls can be made in US dollar, Euro, or Indian rupee. The framework provides certain concessions for swap drawals in Indian rupee.

In a foreign currency swap, each party to the agreement pays interest on the other’s loan principal amounts throughout the length of the agreement. When the swap is over, if principal amounts were exchanged, they are exchanged once more at the agreed upon rate (which would avoid transactional risk) or the spot rate.

5.  Option Market

In the options market, the currency of exchange from one denomination to the other is agreed upon by the investor at a specific rate and on a specific date. The investor has a right to convert the currency on a future date but there is no obligation to do so.

Options traded in the forex marketplace differ from those in other markets in that they allow traders to trade without taking actual delivery of the asset. Forex options trade over the counter (OTC), and traders can choose prices and expiration dates which suit their hedging or profit strategy needs.

Conclusion

If you want to start forex trading, simply open to demat trading account and start investing. The transactions can be done in all conversions of currencies. Globalisation has increased in the number of foreign exchange transactions that are carried out each year. Foreign exchange transactions also include the conversion of currencies done at the airport kiosks or the payments made by government and financial institutions.

When price of a foreign currency falls, imports from that foreign country become cheaper. So, imports increase and hence, the demand for foreign currency rises.

The role of banks in international trade is crucial. The banks provide financing products such as letters of credit, forex and helps to reduce risks and allow transactions to go smoothly for importers and exporters worldwide. Because of the worldwide trade, commerce, and finance, forex markets tend to be the world’s largest and most liquid asset markets. Nostro and Vostro accounts helps ease foreign exchange in international trade.   

NOSTRO

A nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for “ours,” are frequently used to facilitate foreign exchange. The opposite term “vostro account” derived from the Latin word for “yours,” is how a bank refers to the accounts that other banks have on its books in its home currency.

A Nostro account is an account maintained by a domestic bank with a foreign bank in foreign currency. For example, State Bank of India has opened an account with Bank of America in New York for dealing in US Dollars, this account is called as the Nostro account for the State Bank of India. In the Nostro account, the domestic bank acts as the facilitator – in this case SBI is the facilitator.  A Nostro account with debit balances is considered an asset because domestic banks are often used as custodians to manage the bank’s operations regarding foreign exchange transactions. A bank recognizes the Nostro balance in the account as a debit balance with other banks and hence recorded as the bank’s assets on the balance sheet.

Nostro accounts are usually held by banks and large corporations that are involved in international trade. By holding funds in another bank in a foreign currency, the bank can conduct international trade transactions and foreign exchange without having to convert its local currency into foreign currency. Nostro accounts work by allowing one party to hold money in a bank in a foreign country in that country’s currency. When transactions are conducted through a nostro account, the bank that holds the account aids in completing transactions involving different currencies.

VOSTRO

A Vostro account is an account maintained by a foreign bank with the home currency of that bank. In the Vostro account, the foreign bank acts as the facilitator. Hence SBI’s opening   Vostro account with Bank of America, makes Bank of America facilitator. Vostro means yours. A Vostro account with a credit balance is considered a liability, and a vostro with a debit balance (a loan) is an asset. Another example of such an account is SBI holding a vostro account in HSBC. Several banks, including HDFC Bank and UCO Bank, have opened as many as 30 special vostro accounts to facilitate overseas trade in the rupee. Sberbank and VTB Bank — the largest and second-largest banks of Russia, respectively are the first foreign lenders to receive the approval from RBI. The move to open the special vostro account clears the deck for settlement of payments in rupee for trade between India and Russia, enabling cross-border trade in the Indian currency, which the RBI is keen to promote. RBI announced the guidelines on overseas trade in the rupee in July 2022.

The Government of India has allowed 20 Russian banks, including Rosbank, Tinkoff Bank, Centro Credit Bank and Credit Bank of Moscow have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India. All major domestic banks have listed their nodal officers to sort out issues faced by exporters under the arrangement.

Additionally, it is anticipated to facilitate trade with Russia and other nations subject to sanctions. The RBI’s finalized mechanism allows authorized dealer banks in India to open special rupee vostro accounts on behalf of partner banks. The authorized dealer bank will then need to present the specifics of the arrangement to the central bank for approval.

Domestic banks use Vostro account to provide international banking services to their clients who have global banking needs. Vostro is an integral offshoot of correspondent banking that entails a bank or an intermediary to facilitate wire transfer, conduct business transactions, accept deposits and gather documents on behalf of the other bank. It helps domestic banks gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.

The SRVA is an additional arrangement to the existing system that uses freely convertible currencies and works as a complimentary system. For perspective, freely convertible currencies refer to currencies permitted by rules and regulations of the concerned country to be converted to major reserve currencies like U.S. dollar or pound sterling and for which a fairly active market exists for dealings against major currencies. The existing systems thus require maintaining balances and position in such currencies.

Functioning of SRVA

The framework involves three important components: invoicing, exchange rate and settlement.

The framework entails three important components – invoicing, exchange rate and settlement.

1. Invoicing entails that all exports and imports must be denominated and invoiced in INR.
2. The exchange rate between the currencies of the trading partner countries would be market-determined.
3. The final settlement also takes place in Indian National Rupee (INR).

How much money do you think is in nostro vostro accounts worldwide?

There are $27 trillion dollars resting in nostro and vostro accounts to fulfill payments. Let that sink in for a moment, there is $27 trillion of “dead capital” laying idle for days on end in these accounts.

Gautam Thapar led Avanta Group’s Jhabua thermal power plant is declared as stressed project undergoing resolution as per the Insolvency and Bankruptcy Code (IBC). It has
faced land acquisition and funding issues leading to time and cost overruns. NTPC and Adani group have bid in which NTPC has bid ₹ 1,900-crore offer that was two and-a-half times more than the rival bid of Adani. A typical NPA like this requires a mediator like a bad bank which could play a great role because NTPC’s money goes from the government’s fund.

Bhushan Steel, the largest manufacturer of auto-grade steel in India, has a loan default of ₹ 44,478 crore. The State Bank of India, the lead bank of the consortium of lenders, had moved the NCLT for recovery of its loan. Sajjan Jindal-led JSW Steel showed immense interest in buying out Bhushan Steel. But, finally Tata Steel has acquired Bhushan Steel (BSL) through its wholly-owned subsidiary Bamnipal Steel Ltd (BNL) through a resolution under the Insolvency and Bankruptcy Code (IBC). Tata Steel has taken a controlling stake of 72.65% in BSL and paid the admitted corporate insolvency costs and employee dues.

Lanco Infratech, once listed among fastest growing in the world, has a loan default of ₹ 44,364 crore. IDBI has already initiated the process under the Insolvency and Bankruptcy Code against company’s loan defaults. Vedanta and a Hyderbad-based investment company have bid for Lanco Infratech.   

The above examples and another big list of NPAs have led to a news item of 12th June 2020 in Economic Times which says that State Bank of India and the Indian Banks’ Association have once again revived the proposal for a bad bank which is not just desirable but is most vital. At the moment, India’s most banks are deep into venturing NPAs and to start lending again, to fuel growth, the banking sector needs dynamic strategies. India needs not just any bad bank, but a bad bank jointly owned by the banks themselves. Nonetheless, the Chief Economic Advisor, K Subramanian, has expressed himself not in favour, on the ground that there already are 28 asset reconstruction companies in operation and banks have been unable to sell their bad loans to these entities. Under such circumstances, what nature of ownership could a new bad bank play, and is it viable?

What is a bad bank? To begin with, it is a bank which takes over, that is it buys at a discount, the non-performing loans of banks and then resolves the assets over time, say over five years, leaving the banks that sell off their bad loans and clean up their books. This kind of clarity on their finances helps them in making a fresh start, to raise capital with better ratings and on better terms and to make loans. When a bank is already loaded with a high proportion of bad loans, its appetite for making fresh loans becomes depressing.

It is all the more imperative to tackle post-Covid recovery because until banks are free of their bad-loan burden. And the only way they can do this fast is to unburden their bad loans by selling them off to a bad bank.

Why can’t the banks sell their bad loans to the existing asset reconstruction companies, set up to buy bad loans and resolve them? Bad loans have to be sold at a discount. If a loan of ₹ 1,000 crore has turned non-performing, it cannot be palmed off for ₹ 1,000 crore. The buyer will buy it for say, ₹ 520 crore, or ₹ 600 crore, or even ₹ 400 crore, depending on the probability of realising the money from selling off the assets with which the loan has been secured. Banks are dead scared of accepting a sharp discount, because they might be accused of causing a loss to the bank, and indirectly, to the exchequer, in the case of public sector banks. The Private Sector Banks are no different than the PSBs disturbed private sector lender Yes Bank is in discussions with several asset reconstruction companies (ARCs) to sell off bad loans worth ₹ 32,344 crore. It has appointed EY as an advisor for the bids, Business Standard reported.

The key to the success of a bad bank is its ownership. It should be owned by all the public sector banks, which account for the bulk of non-performing assets on banks’ books, and by private sector bank that want to join in. Their respective shares of ownership can be their share in the total bad loan portfolio. The advantage of having a bad bank owned by the banks collectively is that when the assets underlying a bad loan is resolved, the profits will accrue to the owners, that is, the banks themselves. This would make the loss they book on selling the non-performing assets at a discount more palatable. The better-quality assets would sell at a premium; say power assets that turned non-performing just because a state government went back on its power purchase agreement.

The first bad bank in world experiment was a complete success. In 1988, Mellon Bank of Pittsburgh convinced the Federal to let it set up another bank that would take no deposits but just buy Mellon’s bad loans and resolve them. Mellon gave the bank named Grant Street National Bank, some equity and some preference shares. The rest of the money needed to buy Mellon’s $1.4 billion worth of bad loans at a discount of 53% was raised by issuing short-term bonds: collateralised loan obligations. Drexel Burnham Lambert, the investment bank that specialised in issuing high-yield bonds under junk bond king Michael Milken securitised Grant Street’s assets. There were two tranches of bonds, senior and junior. The senior tranche (portion of money) received investment grade rating while the junior tranche had junk rating and offered a much higher yield. Reportedly, the whiz kids at Drexel dubbed the junior tranche bonds CLOWNS, or Collateralised Loan Obligations worth Nothing Securities. But all securities were paid in full. And Grant Street was wound up.

Mellon hired Arthur Andersen & Co to price the loans for sale to Grant Street. The price arrived at by Arthur Andersen was reviewed by Kenneth Leventhal & Co, an accounting firm with a special grip on real estate, which helped Donald Trump out during his real estate company’s bad times. Such arms-length pricing would be a key to the success of the proposed bad bank in India, too. And if the sale is to a company owned by the banks themselves, and if it has the mandate not just to sell on an ‘as is’ basis but also to run/complete the asset and then sell it off, bankers would have much less to worry than when selling bad loans to private ARCs. And when a bad bank will play a central role, private ARCs would be able to compete with the bad bank to buy stressed assets and pricing would become competitive.

I conclude – bad bank experiments have worked well around the world. It will work well in India too because it will reduce the bankers’ fear of being harassed for selling their bad loans cheap can be addressed. In fact, it’s need of the hour in India.

Foreign exchange is the trading of different national currencies or units of account. It is important because the exchange rate, the price of one currency in terms of another, helps to determine a nation’s economic health and hence the well-being of all the people residing in it.

Currency fluctuations create uncertainty and can quickly turn a solid profit into losses. That is why we need a currency strategy.

There are more than 100 different kinds of official currencies in the world. However, most international forex trades and payments are made using the U.S. dollar, British pound, Japanese yen, and the euro. Other popular currency trading instruments include the Australian dollar, Swiss franc, Canadian dollar, and New Zealand dollar.

The Bretton Woods Agreement

The purpose of the Bretton Woods meeting was to set up a new system of rules, regulations, and procedures for the major economies of the world to ensure their economic stability. To do this, Bretton Woods established the International Monetary Fund (IMF) and the World Bank.

The Bretton Woods agreement was created in a 1944 conference of all of the World War II allied nations. It took place in Bretton Woods, New Hampshire. Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar.

The Bretton Woods Agreement and System created a collective international currency exchange regime that lasted from the mid-1940s to the early 1970s. The Bretton Woods System required a currency peg to the U.S. dollar which was in turn pegged to the price of gold.

As a result of the Bretton Woods Agreement, the U.S dollar was officially crowned the world’s reserve currency, backed by the world’s largest gold reserves. … Needing a place to store their dollars, countries began buying U.S. Treasury securities, which they considered to be a safe store of money.

Why did the Bretton Woods system collapse?

The US decision to suspend gold convertibility ended a key aspect of the Bretton Woods system. The remaining part of the System, the adjustable peg disappeared by March 1973. A key reason for Bretton Woods’ collapse was the inflationary monetary policy that was inappropriate for the key currency country of the system

The present values of the foreign currencies (last week): 

• U.S Dollars: 73.79 Indian Rupees
• British Pounds: 93.77 Indian Rupees
• Japanese Yen: 0.70 Indian Rupees
• Euro: 86.02 Indian Rupees
• Australian Dollar: 51.98 Indian Rupees
• Swiss Franc: 80.00 Indian Rupees
• Canadian Dollar: 55.11
• New Zealand Dollar: 48.24 Rupees
• Chinese Yuan: 10.84 Rupees
• United Arab Emirates Dirham: 20.13 Rupees
• Pound Sterling: 93.90 Rupees

Investment Managers and Hedge Funds

Portfolio managers, pooled funds and hedge funds make up the second-biggest collection of players in the forex market next to banks and central banks. Investment managers trade currencies for large accounts such as pension funds, foundations, and endowments. An investment manager with an international portfolio will have to purchase and sell currencies to trade foreign securities. Investment managers may also make speculative forex trades, while some hedge funds execute speculative currency trades as part of their investment strategies.

Multinational Corporations

Firms engaged in importing and exporting conduct forex transactions to pay for goods and services. Consider the example: Thermax Ltd is India’s leading solar energy companies; Thermax buys German solar panel from a German company which imports American components. Thermax sells the solar energy plant to a Chinese company. Thermax receives Chinese yuan which they must covert in Euro to pay the German manufacturer and the German manufacturer must then exchange euros for dollars to pay the American components company. The fact is that firms trade forex to hedge the risk associated with foreign currency translations. The same German firm might purchase American dollars in the spot market, or enter into a currency swap agreement to obtain dollars in advance of purchasing components from the American company in order to reduce foreign currency exposure risk.

Big Indian organizations such as Tata Motors, Dr Reddy’s, Infosys, ICICI Bank, HDFC Bank, MakeMyTrip etc are listed on New York Stock Exchange (NYSE). Indian companies can raise foreign currency funds through the issue of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).

These ADRs and GDRs help companies to tap foreign funds and increase their shareholding base which leads to better share valuation and also creates value for shareholders.

However, most companies go for the GDR route since the accounting norms and other disclosures in case of GDR are less stringent than the requirements in the U.S.

Let’s understand them one by one.

American Depository Receipts

American Depository Receipts (ADRs) are a way of trading non-U.S. stocks on the U.S. exchange. Through ADRs, Indian companies who are willing to raise funds from the U.S. can do so by issuing shares on American Stock exchange.

However, the issuance of ADR is governed by the rules and regulations as laid down by the regulator SEC (Securities and Exchange Commission). The Indian Companies will have to maintain accounts as per the American Standards.

The Indian companies cannot directly list their equity shares on the international stock exchange. So in order to overcome this problem; the companies give shares to an American bank. These American banks in return for those shares provide receipts to the Indian companies.  The companies raise funds by providing those ADR receipts in American share market.

How are ADRs created?

Indian companies cannot directly list their equity shares on the international stock exchange. In order to overcome this problem the corporation gives shares to an American Bank. These banks will take hold of the stock, and issue receipts to Indian companies in return. The companies raise funds by providing those ADR receipts in American share market. These ADRs are listed on the major stock exchanges of the US, like NASDAQ. They can also be sold Over-The-Counter (OTC).

Trading Mechanism of ADRs

One ADR comprises of a certain number of shares in an Indian company and these ADRs are quoted in US dollars. The investors of a foreign country can buy and sell shares directly and the investor is free to convert the ADR to receive the equivalent number of shares. For example, an American citizen willing to invest in Infosys limited in U.S. can do so by purchasing ADR from the listed entity. As an investor, they will receive all the dividends and capital gains in US dollars, no matter where the original company is from.

Trading Mechanism of GDRs

GDRs act as negotiable certificates. Therefore, they are usually traded just like shares of a company in any international market. A single GDR can represent different amounts of shares, as per the company’s needs and objectives. GDRs can also be used to raise capital from countries in the form of US Dollars or Euros. When GDRs are traded in Euros, they are known as European Depository Receipts or EDRs.

What are the Types of GDRs available to Investors?

There are two broad categories of GDRs –

1. Rule 144A GDRs:

These GDRs are those which operate through the rule 144A of the Securities Exchange Commission (SEC) of the US. This rule allows non-American companies to trade and raise capital in the American Markets. It also makes these GDRs a cheaper alternative to raise capital from American markets than Level III ADRs.

2. Regulation S GDRs:

These GDRs are those which help non-American companies raise funds and establish a trading presence in the European markets only. These GDRs usually trade on the London or Luxembourg Stock Exchange only, and are popularly known as REG S GDRs. Only non-American investors can trade in Reg S GDRs. A company can issue both REG S and Rule 144A GDRs, but they will be subject to different laws.

Differences between ADR and GDR:

• American Depository Receipt (ADR) is a depository receipt which is issued by a US depository bank against a certain number of shares of non-US company stock. Whereas Global Depository Receipt (GDR) is a depository receipt which is issued by the international depository bank, representing foreign company’s stock. ADR is issued in America while GDR can be issued in both America and Europe.
• ADR is listed in American Stock Exchange i.e. New York Stock Exchange (NYSE) whereas GDR is listed in non-US stock exchanges like London Stock Exchange or Luxembourg Stock Exchange.
• ADR can be traded in America only while GDR can be traded in all around the world. ADR Market is more liquid (cash) as compared to GDR market. Liquidity plays a crucial role in financial markets. The improvement and stability of market liquidity is important for market participants and serves as a way to enhance financial market credibility. In the absence of liquidity, financial markets cannot provide accurate price signals to investors and corporations, which are crucial for efficient risk sharing and accurate investment decisions. Without the availability of counter-offers, financial markets cease to exist, and they are replaced by individualized bilateral contracts. Thus, some liquidity is necessary for the very existence of a financial market.
• Investor’s participation is more in ADR as compared to GDR.
• ADR market is a retail investor market whereas GDR’s market is institutional one.
• ADR’s disclosure agreements are more tedious as compared to GDR.

Pros and Cons of ADRs and GDRs:

Depository receipts are a unique way of raising funds for companies and a unique investment for diversified portfolios. However, before we invest in them, we should consider the pros and cons of using ADRs and GDRs for both investors and the issuing companies.

Pros:

• They provide access to investments in the foreign markets, thus becoming a great way to diversify our portfolio.
• They are denominated in US Dollars and Euros, both of which are very powerful currencies to hold investments in.
• Since they are treated like shares, they can easily be traded in markets. They also offer all shareholder benefits to different investors.
• For companies, depository receipts are a great way to attract positive international attention and expand their base of shareholders as well.

Cons:

• Depository receipts are one of the most expensive ways to raise capital for companies.
• Since all transactions are happening in foreign currencies, the investments and capital are subject to the volatility of the foreign exchange or forex market.
• Depository receipts are only suitable for High Net Individuals as high amounts of capital are needed to trade in them.
• There are a limited number of companies which offer their shares in the form of depository receipts, thus leaving lesser choices for interested investors.
• So if you are planning to invest in a foreign company, you can do so through depository receipts.

I had written this article for my blog in December 2019 stating that according to the newspaper Mint dated 19^th Nov 2019, former Prime Minister and economist Dr. Manmohan Singh has cautioned that while India is not yet in stagflation territory, it would be prudent to watch out for increased risks of such an event occurring.

Last year, Moody’s Analytics, research arm of ratings agency Moody’s, said that India had entered into a stagflation phase with notably weaker growth but inflation still stubbornly high. Fitch ratings had also said that that the combination of high inflation and slow GDP growth implies that India may have entered into stagflation. Technically, it was not right to say India is faced with stagflation then in Dec 2019. But, today it looks that Moody Analytics might prove to be true….

A sharp decline in consumer spending in the European Union and the United States will reduce imports of consumer goods from developing countries. Developing countries, particularly those dependent on tourism and commodity exports, face heightened economic risks. Global manufacturing production could contract significantly, and the plunging number of travellers is likely to hurt the tourism sector in small island developing States, which employs millions of low-skilled workers.

Before the outbreak of the COVID-19, world output was expected to expand at a modest pace of 2.5 per cent in 2020, as reported in the World Economic Situation and Prospects 2020.

On 12th March 2020 Beijing News.Net has carried a news article that a range of financial institutions around the world have admitted that the corona virus pandemic would have a hard impact on the world economy. Countries around the world are facing the upcoming slowdown. US Federal Reserve has already slashed interest rates by a half-point, CNN reported. Though the likelihood of inflation is low, the threat of stagflation is for real. The global uptick in the Gross Domestic Product (GDP) could be as low as 1 percent this year, reports the Institute for International Finance (IIF) in last week of March 2020.

Stagflation is an economic cycle in which there is a high rate of inflation and also stagnation. Inflation occurs when the general level of prices in an economy increases, which means value of money falls. Stagnation occurs when the production of goods and services in an economy slows down or even starts to decline.

Stagflation, in this view, is caused by cost-push inflation. Cost-push inflation occurs when some force or condition increases the costs of production. This could be caused by government policies (such as taxes) or from purely external factors such as a shortage of natural resources or in a situation like war. Stagflation slows economic growth and creates rather high unemployment. It can also be defined as inflation and a decline in gross domestic product (GDP). But, a fact of stagflation is that real estate and commodities like gold, silver and platinum do well. Investment in these assets is a good decision.

Stagflation is costly and difficult to eliminate, both in social and fiscal terms. There are only a few examples in history and the most notable one occurred in the 1970s in the United States. The onset of stagflation In the 1970s was blamed on the US Federal Reserve’s unsustainable economic policy during the boom years of the late 1950s and 1960s. The Fed moved to keep unemployment low and boosted overall demand for products and services in the 1960s. However, the unnaturally low unemployment during the decade triggered something called a wage-price spiral. The wage-price spiral is a macroeconomic theory used to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. The wage-price spiral suggests that rising wages increase disposable income raising the demand for goods and causing prices to rise.

The OPEC oil prohibition in 1973 also contributed to the unwanted economic event in the US. Industries across the country suffered from excessively high oil prices and shortages. Demand fell to new lows and industrial output suffered.

Theories on the Causes of Stagflation

One theory states that this economic phenomenon is caused when there is a sudden rise in the cost of oil. It reduces an economy’s productive capacity. In October 1973, the OPEC (Organization of Petroleum Exporting Countries) issued a restriction against Western countries. This caused the global price of oil to rise dramatically, thereby increasing the costs of goods and contributing to a rise in unemployment. Because transportation costs rose, producing products and getting them to shelves became more expensive and prices rose even as people got laid off. Critics of this theory point out that sudden oil price shocks like those of the 1970’s did not occur in connection with any of the simultaneous periods of inflation and recession that have occurred since then.

Another theory is that the convergence of stagnation and inflation are results of poorly made economic policy. Harsh regulation of markets, goods and labour in an otherwise inflationary environment are cited as the possible cause of stagflation. Confluence of stagnation and inflation are results of poorly made economic policy. Harsh regulation of markets, goods and labour in an otherwise inflationary environment are cited as the possible cause of stagflation. Some point fingers to the policies set by former US President Richard Nixon, which may have led to the recession of 1970; he is blamed for the period of stagflation. Nixon put tariffs on imports and froze wages and prices for 90 days, in an effort to prevent prices from rising. Once the controls were relaxed, the sudden economic shock of oil shortages and rapid acceleration of prices led to economic chaos in US. While appealing to the former theory of OPEC’s ban of few nations, Nixon’s policies are basically an ad-hoc explanation of the stagflation of the 1970’s, which does not explain the simultaneous rise in prices and unemployment that has accompanied subsequent recessions up to the present.