Month: April 2020

An Analog signal is any continuous signal for which the time varying feature (variable) of the signal is a representation of some other time varying quantity, i.e., analogous to another time varying signal. It differs from a digital signal in terms of small fluctuations in the signal which are meaningful.

A digital signal uses discrete (discontinuous) values. By contrast, non-digital (or analog) systems use a continuous range of values to represent information. Although digital representations are discrete, the information represented can be either discrete, such as numbers or letters, or continuous, such as sounds, images, and other measurements of continuous systems.

Properties of Digital vs Analog signals

Digital information has certain properties that distinguish it from analog communication methods. These include

• Synchronization: Digital communication uses specific synchronization sequences for determining synchronization.
• Language: Digital communications requires a language which should be possessed by both sender and receiver and should specify meaning of symbol sequences.
• Errors: Disturbances in analog communication causes errors in actual intended communication but disturbances in digital communication does not cause errors enabling error free communication. Errors should be able to substitute, insert or delete symbols to be expressed.
• Copying: Analog communication copies are quality wise not as good as their originals while due to error free digital communication, copies can be made indefinitely.
• Granularity: For a continuously variable analog value to be represented in digital form there occur quantization error which is difference in actual analog value and digital representation and this property of digital communication is known as granularity.

Differences in Usage in Equipment

Many devices come with built in translation facilities from analog to digital. Microphones and speaker are perfect examples of analog devices. Analog technology is cheaper but there is a limitation of size of data that can be transmitted at a given time.

Digital technology has revolutionized the way most of the equipments work. Data is converted into binary code and then reassembled back into original form at reception point. Since these can be easily manipulated, it offers a wider range of options. Digital equipment is more expensive than analog equipment.

Comparison of Analog vs Digital Quality

Digital devices translate and reassemble data and in the process are more prone to loss of quality as compared to analog devices. Computer advancement has enabled use of error detection and error correction techniques to remove disturbances artificially from digital signals and improve quality.

Differences in Applications

Digital technology has been most efficient in cellular phone industry. Analog phones have become redundant even though sound clarity and quality was good.

Analog technology comprises of natural signals like human speech. With digital technology this human speech can be saved and stored in a computer. Thus digital technology opens up the horizon for endless possible uses.

Advantages of Digital Communication

As the signals are digitized, there are many advantages of digital communication over analog communication, such as:

• The effect of distortion, noise, and interference is much less in digital signals as they are less affected.
• Digital circuits are more reliable.
• Digital circuits are easy to design and cheaper than analog circuits.
• The hardware implementation in digital circuits, is more flexible than analog.
• The occurrence of cross-talk is very rare in digital communication.
• The signal is un-altered as the pulse needs a high disturbance to alter its properties, which is very difficult.
• Signal processing functions such as encryption and compression are employed in digital circuits to maintain the secrecy of the information.
• The probability of error occurrence is reduced by employing error detecting and error correcting codes.
• Spread spectrum technique is used to avoid signal jamming.
• Combining digital signals using Time Division Multiplexing TDM

is easier than combining analog signals using Frequency Division Multiplexing FDM

• The configuring process of digital signals is easier than analog signals.
• Digital signals can be saved and retrieved more conveniently than analog signals.
• Many of the digital circuits have almost common encoding techniques and hence similar devices can be used for a number of purposes.
• The capacity of the channel is effectively utilized by digital signals.

Elements of Digital Communication

The elements which form a digital communication system is represented by the following block diagram for the ease of understanding.

Following are the sections of the digital communication system.

Source

The source can be an analog signal. Example: A Sound signal

Input Transducer

This is a transducer which takes a physical input and converts it to an electrical signal (Example: microphone). This block also consists of an analog to digital converter where a digital signal is needed for further processes.

A digital signal is generally represented by a binary sequence.

Source Encoder

The source encoder compresses the data into minimum number of bits. This process helps in effective utilization of the bandwidth. It removes the redundant bits unnecessary excess bits,i.e.,zeroes

Channel Encoder

The channel encoder, does the coding for error correction. During the transmission of the signal, due to the noise in the channel, the signal may get altered and hence to avoid this, the channel encoder adds some redundant bits to the transmitted data. These are the error correcting bits.

Digital Modulator

The signal to be transmitted is modulated here by a carrier. The signal is also converted to analog from the digital sequence, in order to make it travel through the channel or medium.

Channel

The channel or a medium, allows the analog signal to transmit from the transmitter end to the receiver end.

Digital Demodulator

This is the first step at the receiver end. The received signal is demodulated as well as converted again from analog to digital. The signal gets reconstructed here.

Channel Decoder

The channel decoder, after detecting the sequence, does some error corrections. The distortions which might occur during the transmission, are corrected by adding some redundant bits. This addition of bits helps in the complete recovery of the original signal.

Source Decoder

The resultant signal is once again digitized by sampling and quantizing so that the pure digital output is obtained without the loss of information. The source decoder recreates the source output.

Output Transducer

This is the last block which converts the signal into the original physical form, which was at the input of the transmitter. It converts the electrical signal into physical output (Example: loud speaker).

Output Signal

This is the output which is produced after the whole process. Example: The sound signal received.

This unit has dealt with the introduction, the digitization of signals, the advantages and the elements of digital communications. In the coming chapters, we will learn about the concepts of Digital communications, in detail.

The organization of the capital market in India presents a striking contrast to the institutional structure in the industrially advanced countries of the West. The rise of institutional finance for industry abroad has been the result mainly of institutionalization of personal savings through savings media like life insurance, pension and provident funds and unit trusts and so on.

The growth of institutional finance for industry in India has come largely through industrial financing institutions created by the government both at the national and regional levels, collectively referred to as development banks.

In other words, a pronounced feature of the system of industrial financing in India is the heavy domination of its structure by the development banks and the relatively minor role of the normal channels of financing.

As a result, industry has come to rely very heavily on the development banks as far as its financing requirements are concerned. In terms of their massive role development banks have out-grown their supplementary character of suppliers of finance in terms of their conception as ‘gap-fillers’.

It, undoubtedly, redounds to their credit that they have been able to channel sufficient funds into the productive system despite un-favourable conditions in the investment market.

The rigorous, exacting and detailed appraisal that development banks conduct is an integral part of term lending, tones up the quality of projects and ensures efficient use of available resources. Moreover, the evaluation of projects by them is objective and impersonal.

This has led to the availability of funds to varied types of enterprises, in particular new or relatively new firms of industries. The provision of financial facilities to such enterprises is of special significance at the present stage of India’s industrialization.

The relevance of the development banks in the industrial financing system is not merely quantitative; it has overwhelmingly qualitative dimensions in terms of their promotional and innovational function.

With the evolution of a meaningful industrial strategy, the accent in financing by the development banks is geared so that industrial development would sub-serve the basic economic objectives of balanced regional development, growth of new entrepreneurial talents and small enterprises and development of indigenous industrial technology, and thus, contribute to the emergence of a widely-diffused yet viable process of industrialization consistent with the socio-economic objective of State policy.

The development banks, in fact, constitute the backbone of the Indian capital market.

This overwhelming relevance of development banks in India notwithstanding their phenomenal growth and the massive reliance of industry on them in consequence have far-reaching implications in so far as the ability of the market to cope with the future requirements of the accelerated programmes of industrial development is concerned.

The present experience of the supply of industrial capital gives a distorted view of this ability. This ‘distortion’ has, inter alia, two serious dimensions.

The first aspect of this ‘distortion’ relates to the real ability of the financing system to cope with the growing requirements of an expanding corporate sector of private industry resulting from accelerated program of industrial development under the five-year plans.

The relevance of capital markets to economic development is based on mobilization of savings and their distribution to productive enterprises. These two interrelated functions are a sine-qua- none of an efficient capital market.

Judged in these terms development banks play rather partial and limited role and a system of industrial financing so heavily dominated by them as the one in India has certainly failed to grow pari-pasu with the planned growth of industry.

This is because the development banks, as financial intermediaries, are essentially distributive agencies as they derive most of their funds from their sponsors and, to that extent, a divorce between collection of savings and their allocation has come into being.

This is a serious obstacle to the growth of an autonomous financing system in the sense of equilibrium between the demand for, and supply of, capital funds. Attention to this weakness of the Indian capital market was drawn in the following words:-

“A weakness of the present institutional structure with its heavy dependence on special institutions is that the system is not organically linked to the ultimate source of savings and depends a little too much on ad-hoc allocation from the treasury. It will be desirable to forge links between the distributory mechanism, on the one hand, and the normal channels of savings on the other, so that the distributing mechanism becomes increasingly capable of growing autonomously with the needs of the economy on the basis of available savings.”

The domination of the institutional structure of the capital market by development banks in India has created yet another serious ‘distortion’ in the form of financial practices of questionable prudence. Since the development banks provided most of the funds in the form of term loans, there is a preponderance of debt in the financial structure of corporate enterprises.

There is, of course, no doubt that term loans, as a form of financing, reduce the dependence of investment on the erratic stock exchanges and the detailed scrutiny of the loan agreement have the effect of promoting greater financial discipline among the borrowers, on the one hand, and more effective public control over the private enterprise, on the other, but the predominant position of debt capital has made the capital structure of the borrowing concerns lopsided and unbalanced and, on considerations of orthodox canons of corporate financing, highly imprudent.

The sympathetic and flexible attitude of development banks as public financial institutions in case of defaults arising out of temporary difficulties can, of course, permit a greater use of debt than is warranted by the traditional concept of a sound capital structure but it does not justify the unlimited use of debt capital as it is likely to jeopardize the future of the company itself.

The solution to the problem implicit in these distortions obviously lies in securing an organic link between the distributive mechanism and the ultimate pool of the savings of community.

The banking system in India is regulated by the Reserve Bank of India (RBI), through the provisions of the Banking Regulation Act, 1949. Some important aspects of the regulations that govern banking in this country, as well as RBI circulars that relate to banking in India, will be explored below.

Exposure limits

Lending to a single borrower is limited to 15% of the bank’s capital funds (tier 1 and tier 2 capital), which may be extended to 20% in the case of infrastructure projects. For group borrowers, lending is limited to 30% of the bank’s capital funds, with an option to extend it to 40% for infrastructure projects. The lending limits can be extended by a further 5% with the approval of the bank’s board of directors. Lending includes both fund-based and non-fund-based exposure.

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

Banks in India are required to keep a minimum of 4% of their net demand and time liabilities (NDTL) in the form of cash with the RBI. These currently earn no interest. The CRR needs to be maintained on a fortnightly basis, while the daily maintenance needs to be at least 95% of the required reserves. In case of default on daily maintenance, the penalty is 3% above the bank rate applied on the number of days of default multiplied by the amount by which the amount falls short of the prescribed level.

Over and above the CRR, a minimum of 22% and a maximum of 40% of NDTL, which is known as the SLR, needs to be maintained in the form of gold, cash or certain approved securities. The excess SLR holdings can be used to borrow under the Marginal Standing Facility (MSF) on an overnight basis from the RBI. The interest charged under MSF is higher than the repo rate by 100 bps, and the amount that can be borrowed is limited to 2% of NDTL. (To learn more about how interest rates are determined, particularly in the U.S., consider reading more about who determines interest rates.)

Provisioning

Non-performing assets (NPA) are classified under 3 categories: substandard, doubtful and loss. An asset becomes non-performing if there have been no interest or principal payments for more than 90 days in the case of a term loan. Substandard assets are those assets with NPA status for less than 12 months, at the end of which they are categorized as doubtful assets. A loss asset is one for which the bank or auditor expects no repayment or recovery and is generally written off the books.

For substandard assets, it is required that a provision of 15% of the outstanding loan amount for secured loans and 25% of the outstanding loan amount for unsecured loans be made. For doubtful assets, provisioning for the secured part of the loan varies from 25% of the outstanding loan for NPAs that have been in existence for less than one year, to 40% for NPAs in existence between one and three years, to 100% for NPA’s with a duration of more than three years, while for the unsecured part it is 100%.

Provisioning is also required on standard assets. Provisioning for agriculture and small and medium enterprises is 0.25% and for commercial real estate it is 1% (0.75% for housing), while it is 0.4% for the remaining sectors. Provisioning for standard assets cannot be deducted from gross NPA’s to arrive at net NPA’s. Additional provisioning over and above the standard provisioning is required for loans given to companies that have unhedged foreign exchange exposure.

Priority sector lending

The priority sector broadly consists of micro and small enterprises, and initiatives related to agriculture, education, housing and lending to low-earning or less privileged groups (classified as “weaker sections”). The lending target of 40% of adjusted net bank credit (ANBC) (outstanding bank credit minus certain bills and non-SLR bonds) – or the credit equivalent amount of off-balance-sheet exposure (sum of current credit exposure + potential future credit exposure that is calculated using a credit conversion factor), whichever is higher – has been set for domestic commercial banks and foreign banks with greater than 20 branches, while a target of 32% exists for foreign banks with less than 20 branches.

The amount that is disbursed as loans to the agriculture sector should either be the credit equivalent of off-balance-sheet exposure, or 18% of ANBC – whichever of the two figures is higher. Of the amount that is loaned to micro-enterprises and small businesses, 40% should be advanced to those enterprises with equipment that has a maximum value of 200,000 rupees, and plant and machinery valued at a maximum of half a million rupees, while 20% of the total amount lent is to be advanced to micro-enterprises with plant and machinery ranging in value from just above 500,000 rupees to a maximum of a million rupees and equipment with a value above 200,000 rupees but not more than 250,000 rupees.

The total value of loans given to weaker sections should either be 10% of ANBC or the credit equivalent amount of off-balance sheet exposure, whichever is higher. Weaker sections include specific castes and tribes that have been assigned that categorization, including small farmers. There are no specific targets for foreign banks with less than 20 branches.

The private banks in India until now have been reluctant to directly lend to farmers and other weaker sections. One of the main reasons is the disproportionately higher amount of NPA’s from priority sector loans, with some estimates indicating it to be 60% of the total NPAs. They achieve their targets by buying out loans and securitized portfolios from other non-banking finance corporations (NBFC) and investing in the Rural Infrastructure Development Fund (RIDF) to meet their quota.

New bank license norms

The new guidelines state that the groups applying for a license should have a successful track record of at least 10 years and the bank should be operated through a non-operative financial holding company (NOFHC) wholly owned by the promoters. The minimum paid-up voting equity capital has to be five billion rupees, with the NOFHC holding at least 40% of it and gradually bringing it down to 15% over 12 years. The shares have to be listed within three years of the start of the bank’s operations.

The foreign shareholding is limited to 49% for the first five years of its operation, after which RBI approval would be needed to increase the stake to a maximum of 74%. The board of the bank should have a majority of independent directors and it would have to comply with the priority sector lending targets discussed earlier. The NOFHC and the bank are prohibited from holding any securities issued by the promoter group and the bank is prohibited from holding any financial securities held by the NOFHC. The new regulations also stipulate that 25% of the branches should be opened in previously unbanked rural areas.

Willful defaulters

A willful default takes place when a loan isn’t repaid even though resources are available, or if the money lent is used for purposes other than the designated purpose, or if a property secured for a loan is sold off without the bank’s knowledge or approval. In case a company within a group defaults and the other group companies that have given guarantees fail to honor their guarantees, the entire group can be termed as a willful defaulter.

Willful defaulters (including the directors) have no access to funding, and criminal proceedings may be initiated against them. The RBI recently changed the regulations to include non-group companies under the willful defaulter tag as well if they fail to honor a guarantee given to another company outside the group.

The Bottom Line

The way a country regulates its financial and banking sectors is in some senses a snapshot of its priorities, its goals, and the type of financial landscape and society it would like to engineer. In the case of India, the regulations passed by its reserve bank give us a glimpse into its approaches to financial governance and shows the degree to which it prioritizes stability within its banking sector, as well as economic inclusiveness.

Though the regulatory structure of India’s banking system seems a bit conservative, this has to be seen in the context of the relatively under-banked nature of the country. The excessive capital requirements that have been set are required to build up trust in the banking sector while the priority lending targets are needed to provide financial inclusion to those to whom the banking sector would not generally lend given the high level of NPA’s and small transaction sizes.

Since the private banks, in reality, do not directly lend to the priority sectors, the public banks have been left with that burden. A case could also be made for adjusting how the priority sector is defined, in light of the high priority given to agriculture, even though its share of GDP has been going down. (For related reading, see “The Increasing Importance of the Reserve Bank of India”)

Primary Operational Aspects of Commercial Bank in India

Refer to the basic functions of commercial banks that include the following:

Accepting Deposits

Implies that commercial banks are mainly dependent on public deposits.

There are two types of deposits, which are discussed as follows:

• Demand Deposits: Refer to kind of deposits that can be easily withdrawn by individuals without any prior notice to the bank. In other words, the owners of these deposits are allowed to withdraw money anytime by simply writing a check. These deposits are the part of money supply as they are used as a means for the payment of goods and services as well as debts. Receiving these deposits is the main function of commercial banks.
• Time Deposits: Refer to deposits that are for certain period of time. Banks pay higher interest on rime deposits. These deposits can be withdrawn only after a specific time period is completed by providing a written notice to the bank.
• Advancing Loans: Refers to one of the important functions of commercial banks. The public deposits are used by commercial banks for the purpose of granting loans to individuals and businesses. Commercial banks grant loans in the form of overdraft, cash credit, and discounting bills of exchange.

Secondary Operational Aspects of Commercial Bank in India

Refer to crucial functions of commercial banks. The secondary functions can be classified under three heads, namely, agency functions, general utility functions, and other functions.

These functions are explained as follows:

1. Agency Functions

Implies that commercial banks act as agents of customers by performing various functions, which are as follows:

(a) Collecting Checks

Refer to one of the important functions of commercial banks. The banks collect checks and bills of exchange on the behalf of their customers through clearing house facilities provided by the central bank.

(b) Collecting Income

Constitute another major function of commercial banks. Commercial banks collect dividends, pension, salaries, rents, and interests on investments on behalf of their customers. A credit voucher is sent to customers for information when any income is collected by the bank.

(c) Paying Expenses

Implies that commercial banks make the payments of various obligations of customers, such as telephone bills, insurance premium, school fees, and rents. Similar to credit voucher, a debit voucher is sent to customers for information when expenses are paid by the bank.

2. General Utility Functions

Include the following functions:

(a) Providing Locker Facilities

Implies that commercial banks provide locker facilities to its customers for safe keeping of jewellery, shares, debentures, and other valuable items. This minimizes the risk of loss due to theft at homes.

(b) Issuing Traveler’s Checks

Implies that banks issue traveler’s checks to individuals for traveling outside the country. Traveler’s checks are the safe and easy way to protect money while traveling.

(c) Dealing in Foreign Exchange

Implies that commercial banks help in providing foreign exchange to businessmen dealing in exports and imports. However, commercial banks need to take the permission of the central bank for dealing in foreign exchange.

(d) Transferring Funds

Refers to transferring of funds from one bank to another. Funds are transferred by means of draft, telephonic transfer, and electronic transfer.

3. Other Functions

Include the following:

(a) Creating Money

Refers to one of the important functions of commercial banks that help in increasing money supply. For instance, a bank lends Rs. 5 lakh to an individual and opens a demand deposit in the name of that individual.

Bank makes a credit entry of Rs. 5 lakh in that account. This leads to creation of demand deposits in that account. The point to be noted here is that there is no payment in cash. Thus, without printing additional money, the supply of money is increased.

(ii) Electronic Banking

Include services, such as debit cards, credit cards, and Internet banking.