Money, Banking and Insurance in India

  • The Reserve Bank of India was established on 1st April, 1935 and it was nationalized on 1st January, 1949.
  • The Finance Ministry issues Currency Notes and Coins of rupee one, all other Currency Notes are issued by the Reserve Bank of India.
  • The first bank of limited liability managed by Indians was Oudh Commercial Bank founded in 1881. Subsequently, Punjab National Bank was established in 1894.
  • Swadeshi movement, which began in 1906, encouraged the formation of a number of commercial banks.
  • The Banking Companies Act was passed in February', 1949, which was subsequently amended to read as Banking Regulation Act, 1949.

Money and Banking

  • Broad money (M3) grew by 10.49% in the fortnight ending August 13, 2021 compared to 9.91% in the previous fortnight and 12.58% in the corresponding period of previous year. Growth in currency with public, demand deposits and time deposits stood at 10.05 %, 21.80 % and 9.22 % respectively in the fortnight ending August 13, 2021 compared to respective component growths of 10.21%, 19.44% and 8.65 % in the previous fortnight and 23.15%, 10.76 % and 10.90 % in the corresponding period of previous year.

Monetary Policy Transmission

  • RBI has reduced repo rate by 250 bps since February 2019 (the current easing cycle). The transmission of policy repo rate changes has been weak on quantity of credit. However, there has been improved transmission on rate structure and term structure.

Rate structure

  • The transmission of policy repo rate changes to deposit and lending rates of scheduled commercial banks (SCBs) has improved since March 2020 reflecting the combined impact of policy rate cuts, large liquidity surplus with accommodative policy stance, and the introduction of external benchmark-based pricing of loans. The Weighted Average Lending Rate (WALR) on fresh rupee loans declined by 94 bps between March 2020 and November 2020 in response to the reduction of 115 bps in the policy repo rate and comfortable liquidity conditions.
  • In the current easing phase (February 2019 to November 2020), the change in the WALR on outstanding rupee loans has shown significant improvement since March 2020. Of the 83-bps decline in WALR on outstanding loans in February 2019 to November 2020 period, 67 bps decline was noted since March 2020.
  • The weighted average domestic term deposit rate (WADTDR) on outstanding rupee deposits declined by 127 bps during the ongoing easing cycle. The median term deposit rate has registered a sizable decline of 146 bps in March to December 2020. The spread between WALR on outstanding loans and repo rate which was increasing since 2018 started to decline in 2020-21. However, WALR on outstanding loans is still 544 bps higher than repo rate.

MUDRA BANK

MUDRA stands for Micro Units Development Refinance.

MUDRA Bank has been set up through a statutory enactment. It is responsible for development and refinancing through Pradhan Mantri MUDRA Yojana.

It will partner with local coordinators and provide finance to 'Last Mile Financiers' of micro businesses.

It has been targeted towards main streaming young, educated or skilled workers and entrepreneurs including women entrepreneurs.

This bank will nurture small businesses through different stages of growth and development of businesses termed as Shishu (when the business is just starting. Loan cover in this stage willbeupto Rs. 50,000), Kishor (Loan cover ranging frorr Rs. 50,000 to Rs. 5 lakh) and Tarun (Loan cover upto 10 lakh).

Launched on 8 April, 2015 by the Prime Minister, the MU DR A Bank was proposed in Budget 2015-16 with an initial corpus of Rs. 20,000 crore and a credit guarantee fund of Rs. 3,000 crore

Banking in India

Banks in India are classified into four categories-

1. Commercial Banks (Comprises Commercial Banks. Public Sector Bank, Private Sector Bank, Regional Rural Bank and Foreign Bank)

2. Small Finance Banks

3. Payments Banks

4. Co-operative Banks (Comprises Urban Co-operative Bank and Rural Co-operative Bank)

Public Sector Banks

  • Public Sector Banks (PSBs) are a major type of bank in India, where a majority stake (i.e. more than 50%) is held by the government.
  • In April 2019, Vijaya Bank and Dena Bank were merged with Bank of Baroda.
  • On 30 August, 2019, Union Finance Minister Nirmala Sitaraman announced merger of six public sector banks (PSBs) with four better performing anchor banks in order to streamline their operation and size, two banks were amalgamated to strengthen national presence and four were amalgamated to strengthen regional focuses. Subsequently, the number of public sector banks has been reduced to 12 from 27.

List of Scheduled Public Sector Banks (As on 23rd Septemeber, 2022)

S.

Anchor bank

Es.in

Merged Bank

Headquarters

1

Bank of Baroda

1908

Dena Bank, Vijaya Bank

Vadodara, Gujarat

2

Bank of India

1906

––

Mumbai, Maharashtra

3

Bank of Maharashtra

1935

 ––

Pune, Maharashtra

4

Canara Bank

1906

Syndicate Bank

Bengaluru, Karnataka

5

Central Bank of India

1911

 ––

Mumbai, Maharashtra

6

Indian Bank

1907

Allahabad Bank

Chennai, Tamil Nadu

7

Indian Overseas Bank

1937

 ––

Chennai, Tamil Nadu

8

Punjab and Sind Bank

1908

 ––

New Delhi, Delhi

9

Punjab National Bank

1894

Oriental Bank of Commerce, United Bank of India

New Delhi, Delhi

10

State Bank of India

1955

State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra, State Bank of Travancore, Bhartiya Mahila Bank

Mumbai, Maharashtra

11

UCO Bank

1943

––

Kolkata, West Bengal

12

Union Bank of India

1919

Andhra Bank, Corporation Bank

Mumbai, Maharashtra

List of Scheduled Private Sector Banks

S.

Bank Name

Established

Headquarter

Branches

1

Axis Bank Ltd.*

1993

Mumbai, Maharashtra

4800

2

Bandhan Bank Ltd.

2015

Kolkata, West Bengal

1,000

3

Catholic Syrian Bank Ltd.

1920

Thrissur, Kerala

426

4

City Union Bank Ltd.

1904

Thanjavur, Tamil Nadu

600

5

DCB Bank Ltd.

1930

Mumbai, Maharashtra

323

6

Dhanlaxmi Bank Ltd.

1927

Thrissur, Kerala

269

7

Federal Bank Ltd.

1931

Kochi, Kerala

1,252

8

HDFC Bank Ltd.

1994

Mumbai, Maharashtra

4,787

9

ICICI Bank Ltd.

1994

Mumbai, Maharashtra

4,882

10

IDBI Bank Ltd.

1964

Mumbai, Maharashtra

1,892

11

IDFC First Bank Ltd.

2015

Mumbai, Maharashtra

301

12

Indusind Bank Ltd.

1994

Mumbai, Maharashtra

1,004

13

Jammu & Kashmir Bank Ltd.

1938

Srinagar, Jammu & Kashmir

958

14

Karnataka Bank Ltd.

1924

Mangaluru, Karnataka

835

15

Karur Vysya Bank Ltd.

1916

Karur, Tamil Nadu

668

16

Kotak Mahindra Bank Ltd.

2003

Mumbai, Maharashtra

1,369

17

Lakshmi Vilas Bank Ltd.

1926

Karur, Tamil Nadu

570

18

Nainital Bank Ltd.

1922

Nainital, Uttarakhand

135

19

RBL Bank Ltd.

1943

Mumbai, Maharashtra

342

20

South Indian Bank Ltd.

1929

Thrissur, Kerala

852

21

Tamilnad Mercantile Bank Ltd.

1921

Thoothukudi, Tamil Nadu

509

22

Yes Bank Ltd.

2004

Mumbai, Maharashtra

1,050

  • The name of UTI Bank has been changed into Axis Bank Ltd. w.e.f. July 31, 2007.

 

  • Bank owned by State Government: State Bank of Sikkim (As on 22 September, 2022).
  • Regional Rural Banks (RRBs): There are 43 RRBs in India (As on 22 September, 2022).
  • Foreign Banks: There are 45 foreign banks in India (as on 22 September, 2022).
  • Commercial banks mobilise savings in urban areas and make them available to large and small industrial and trading units mainly for working capital requirements.
  • The Indian banking system consists of commercial banks, both in public and private sector, Regional Rural Banks (RRBs) and cooperative banks.
  • Commercial banks are broadly classified into nationalised or public sector banks and private sector banks, with a few foreign banks. The public sector banks account for more than 92% of the entire banking business in India-occupying a dominant position in the commercial banking. The State Bank of India and its associate banks along with another 11 banks are the public sector banks.

No. of SC Banks

According to RBI, number of all Schedule Commercial Bank is 137, which includes 12 PSBs, 43 Regional Rural Banks (RRBs) 12 Small Finace Banks (SFBs), 4 Payments Banks (PBs) and 45 Foreign Banks.

  • Oudh Commercial Bank was the first complete Commercial Bank of India.
  • The Imperial Bank was established in the year 1921 by merging three main Presidency Banks.
  • The largest bank—Imperial Bank was nationalised in 1955 on recommendation of Gorewala Committee and rechristened as State Bank of India.
  • In 1959, 7 regional banks were nationalised and given the status of Associate Banks of State Bank of India.
  • On 19th July, 1969,14 big commercial banks with deposits worth Rs. 50 crores or more and on 15th April, 1980, six other scheduled banks were nationalised, bringing total number of nationalised banks to 27 (19 + SBI + 7 SBI Associates).
  • Before the merger of New Bank of India in Punjab National Bank (in 1993) the total number of nationalised banks was 28 (8* SBI and Associates + 14 + 6).
  • After the merger of 'State Bank of Saurashtra' (in2008) and 'State Bank of Indore' (in 2010) in the State Bank of India, the number of Associates of SBI has come to 5. But now after the merger of State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Patiala and State Bank of Hyderabad with SBI, the numbers of SBI Associates have become zero.

Merger of SBI Associates

The 5 associate banks of SBI—State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), State Bank of Patiala and State Bank of Hyderabad and Bhartiya Mahila Bank (BMB) have been merged with State Bank of India since April 1, 2017.

Lead Bank Scheme

  • After the nationalisation of 14 banks the Lead Bank Scheme of the RBI was adopted in 1969 for branch expansion programme of banks.
  • Under the scheme, all the nationalised banks and private banks were allotted specific distracts where they were asked to take the lead in surveying the scope of banking development particularly expansion of credit facilities.

Banking Reforms

  • On the recommendation of Narsimham Committee, a number of steps taken to improve functioning of banking sector. SLR and CRR were reduced.
  • Banks were given freedom to open new branches. Rapid computerisation of banks was undertaken.
  • Banking 'Ombudsmen Scheme' started functioning to expedite inexpensive resolution of customer's complaints.

Scheduled and Non-scheduled Banks

  • The scheduled banks are those which are entered in the second schedule of the RBI Act, 1934. These banks have a paid-up capital and reserves of an aggregate value of not less than Rs. 5 lakhs and satisfy the RBI that their affairs are carried out in the interest of their depositors.
  • All commercial banks (Indian and foreign), regional rural banks and state co-operative banks are scheduled banks. Non-scheduled banks are those which are not included in the second schedule of the RBI Act 1934. At present there is only one such bank in the country.

Regional Rural Banks

  • First Regional Rural Bank was established on 2nd October, 1975.
  • The Regional Rural Banks (RRBs), the newest form of banks, have come into existence since middle of 1970s (sponsored by individual nationalised commercial banks) with the objective of developing rural economy by providing credit and deposit facilities for agriculture and other productive activities of all kinds in rural areas.
  • The emphasis is on providing such facilities to small and marginal farmers, agricultural labourers, rural artisans and other small entrepreneurs in rural areas. Total number of RRBs (after merger) was 56 (in 525 districts) with 14,494 branches (as on 31.03.2016).

Co-operative Banks

  • Co-operative banks are so called because they are organised under the provisions of the Co-operative Credit Societies law of the states. The major beneficiary of the Co-operative Banking is the agricultural sector in particular and the rural sector in general. The first such bank was established in 1904.
  • The Co-operative credit institutions operating in the country are mainly of two kinds: agricultural (dominant) and non-agricultural.
  • At the apex is the State Co-operative Bank (SCB) (co-operation being a state subject in India), at the intermediate (district) level is the Central Cooperative Banks (CCBs), and at the village level is Primary Agricultural Credit Societies (PACS); Longterm agricultural credit is provided by the Land Development Banks.
  • In the year 1991, Narsimham Committee was constituted to advice on the issue of reconstruction of banking system.

Bharatiya Mahila Bank

With a purpose to promote gender equality and empowerment of women, Government of India had set up India's first Women's Bank-'Bhartiya Mahila Bank Limited'.

Launched on 19thNovember, 2013, the Bank has carved a niche for itself as a pan India Bank with 60 branches across the country.

Mrs. Usha Ananthasubramanian was the first Chairman and Managing Director of the Bank and S. M. Swathi was the first Executive Director of Bank.

The Bank has been allocated with an initial capital of Rs. 1,000 Crores.

  • The Government decided on 20th March, 2017 to merge the Bhartiya Mahila Bank in State Bank of India.
  • All branches of BMB merged with SBI from April 1,2017

 

Development Banks

  • Industrial Development Bank of India (IDBI), established in 1964.

Main functions: Providing finance to large and medium scale industrial units.

  • Industrial Finance Corporation of India (IFCI), established in 1948,

Main Functions: (a) Project finance (b) Promotional services.

  • Industrial Credit and Investment Corporation of India Limited (ICICI), formed in 1955

Main functions: Providing term loans in Indian and foreign currencies; Underwriting of issues of shares and debentures.

  • Small Industries Development Bank of India (SIDBI) established in 1989.

Main functions: Providing assistance to small scale industries through state finance corporations, state industrial development corporations, commercial banks etc.

  • EXIM BANK (Export Import Bank of India), established in 1982 is a specialised financial institution, wholly owned by Government of India, set up for financing facilitating and providing foreign trade of India.

Main functions: Coordinating the working of institutions engaged in financing export and import trade, the paid up capital was 5,059 crore and the Net Worth of the Bank (as on 31.03.2015) was Rs. 9,902 crore.

  • National Housing Bank (NHB) started operations in 1988.

Main functions: Development of housing finance in the country.

  • NABARD (National Bank for Agriculture and Rural Development) was established in 1982 with initial capital of Rs. 100 crore. The paid-up capital of NABARD stood at Rs. 15,080 crore as on 31 March, 2021.

Main functions: To serve as an apex refinancing agency for institutions engaged in providing agricultural finance to develop credit delivery system to coordinate rural financing activities.

New Development Bank

  • The New Development Bank (NDB) has been instituted in 2015 with a vision to support and foster infrastructure and sustainable development initiatives in emerging economies.
  • The Founding members of the NDB-Brazil, Russia, India, China and South Africa (BRICS) have brought in capital of USD 1 billion as initial contribution.

Asian Infrastructure Investment Bank

  • Asian Infrastructure Investment Bank (AIIB) is a Multilateral Development Bank (MDB) set up in 2016 to foster sustainable economic development, create productive assets and improve infrastructure in Asia through financing of Infrastructure projects.
  • India is one of the founding Members and the second largest shareholder. India along with 20 other countries signed the Inter-Government Memorandum of Under standing (MoU) for establishing the AIIB in Beijing.

International Fund for Agricultural Development

  • International fund for Agricultural Development (IFAD) was set up in 1977 as the 13th specialized agency of the United Nations. It is dedicated to eradicating, poverty.176 countries are members of the IFAD, and these are grouped into three countries, comprising List-A:  Developed Countries, List-B: Oil Producing Countries and List-C: Developing Countries.
  • India is in List-C. India is one of the founder members of International Fund for Agricultural Development (IFAD), and has so far contributed US$ 147.0 million towards IFAD’s resources.

Asian Development Bank

  • India is a founding member of the Asian Development Bank (ADB) which was established in 1966. ADB has 67 members (including 48 regional and 19 non-regional members), with its headquarters at Manila, Philippines.
  • India is holding 6.32% of shares, totaling 6,72,030 shares in ADB as on 31st December 2021, with 5.35% voting rights.
  • The Bank is engaged in promoting economic and social progress of its developing member countries (DMCs) in the Asia Pacific Region.
  • India borrows from ADB within overall external debt management policy pursued by the Government which focuses on raising funds on concessional terms from less expensive sources with longer maturities. India started borrowing from ADB in 1986. [Source: ADB]

Insurance

  • The basic concept of insurance is of spreading the loss of a few over many. Insurance industry includes two sectors—Life Insurance and General Insurance. Life Insurance in India was introduced by Britishers. A British firm in 1818 established the Oriental Life Insurance Company at Calcutta, (now Kolkata).
  • Life Insurance Corporation (LIC) of India was established in September, 1956. General Insurance Corporation (GIC) was established in November, 1972.
  • Indian Insurance sector has low penetration particularly in rural areas. It also has low turnover and profitability despite high premium rate. The committee on Insurance Sector Reforms was set-up in 1993 under the chairmanship of R.N. Malhotra which submitted its report in 1994.
  • The insurance sector was opened up for private participation with the enactment of the Insurance Regulatory and Development Authority Act, 1999 (IRDA). The headquarter of IRDA is at Hyderabad.
  • According to INDIA 2022, Life Insurance Corporation has its Central Office in Mumbai, 8 Zonal Offices at Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Kanpur, Bhopal and Patna, 113 Divisional Offices, 73 Customer Zones, 2048 Branch Offices, 1401 Satellite Offices and 1240 mini offices as on 21 September, 2022, spreads the message of Insurance the length and breadth of India.
  • At present LIC is operating internationally (in 14 countries) through Branch Offices in Fiji, Mauritius and U.K. and through Joint Venture Companies in Bahrain, Nepal, Sri Lanka, Kenya and Saudi Arabia. A wholly owned subsidiary, LIC (Singapore) established in April 2012.

Important Banking Terminology

Bank Rate:

Bank Rate is the rate at which central bank of the country (e.g. RBI in India) allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Base Rate/Benchmark Prime Lending Rate. Thus any revision in the Bank rate indicates that it is likely that interest rates on customer's deposits are likely to either go up or go down, and it can also indicate an increase or decrease in customer's EMI.

Basis points:

 It is the increase in interest rates in percentage terms. For instance, if the interest rate increases by 50 basis points (bsp), then it means that interest rate has been increased by 0.50%. One percentage point is broken down into 100 basis points. Therefore, an increase from 2 to 3% is an increase of one percentage point or 100 basis points.

LRR (Legal Reserve Ratio)

LRR includes CRR and SLR. CRR (Cash Reserve Ratio). CRR is the amount of funds that the banks have to keep with RBI. If RBI increases CRR, the available amount with the banks comes down. RBI is using this method (increase of CRR), to drain out the excessive money from the banks.

SLR (Statutory Liquidity Ratio):

SLR is the amount a commercial bank needs to maintain in the form of cash or gold or govt, approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by RBI in order to control the expansion of the bank credit. With the SLR, the RBI can ensure the solvency of a commercial bank. SLR is used to control inflation and propel growth. Through SLR rate the money supply in the system can be controlled effectively.

Repo Rate:

Repo rate is the rate at which commercial banks borrows rupees from RBI. A reduction in the repo rate will help banks to get money at cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

Reverse Repo Rate:

Reverse Repo rate is the rate at which RBI borrows money from commercial banks. Banks are always happy to lend money to RBI since their money is in the safe hands with a good interest. An increase in reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. Reverse Repo Rate is always 1 percent less than the Repo Rate.

NEFT (National Electronic Fund Transfer):

NEFT enables funds transfer from one bank to another but works a bit differently than RTGS. NEFT is slower than RTGS. The transfer is not direct and RBI acts as the service provider to transfer the money from one account to another. You can transfer any amount through NEFT, even a rupee.

National Electronic Fund Transfer (NEFT)

  • NEFT began operations on November 21, 2005 with one settlement a day, in which only eight banks had participated. Sub-sequently, 216 banks participated with settlements progressing to half-hour batches from 8 am to 7 pm. NEFT handles on an average 10.5 million transactions daily with an average value of around Rs. 80,000 crore.
  • About 57% of the retail payment systems in terms of value, as of October 2019, went through the NEFT system, according to the RBI data.
  • The average ticket size for NEFT in October 2019 was over Rs. 76,500 as compared to Rs. 8,900 and Rs. 1,660 in IMPS (Immediate Payment Service) and UPI (Unified Payments Interface) respectively.
  • Effective July 1, 2019 the RBI had waived processing charges for transactions processed in NEFT.
  • From December 16, 2019, the facility got activated and banks have started offering their customers round-the-clock NEFT services, except for a half an hour break after midnight in some cases.

RTGS (Real Time Gross Settlement):

RTGS system is funds transfer system where transfer of money or securities takes place from one bank to another on a 'real time' and on 'gross' basis. Settlement in 'real time' means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. Minimum & Maximum Limit of RTGS: 2 lakh and no upper limit.

Liquidity Adjustment Facility (LAF):

is a monetary policy tool which allows banks to borrow money through repurchase agreements. LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo operations.

Marginal Standing Facility (MSF):

MSF rate is the rate at which banks borrow funds overnight from the Reserve Bank of India (RBI) against approved government securities. MSF is always 1 percent more than the Repo Rate.

NOSTRO Account:

A Nostro account is maintained by an Indian Bank in the foreign countries.

VOSTRO Account:

A Vostro account is maintained by a foreign bank in India with their corresponding bank.

CRAR (Capital to Risk Weighted Assets Ratio):

Capital to risk weighted assets ratio is arrived at by dividing the capital of the bank with aggregated risk weighted assets for credit risk, market risk and operational risk.

SDR (Special Drawing Rights):

SDR are new form of International reserve assets, created by the International Monetary Fund in 1967. The value of SDR is based on the portfolio of widely used countries and they are maintained as accounting entries and not as hard currency or physical assets like Gold.

BOND:

Publicly traded long term debt securities issued by corporations and governments, whereby the issuer agrees to pay a fixed amount of interest over a specified period of time and to repay a fixed amount of principal maturity.

Non Performing Assets (NPA):

An asset (loan), including a leased asset, becomes non performing when it stops generating income for the bank.

Note:  Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset.

Currency and Coinage

  • Security Printing and Minting Corporation of India Ltd. (SPMCIL) is the only PSU under the Department of Economic Affairs. It was formed after corporatisation of nine units, i.e. four mints, four presses (two currency note presses and two security presses) and one paper mill which were earlier functioning under the Ministry.
  • The company was incorporated in 2006 under the Companies Act, 1956. It is engaged in the manufacturing of security paper, minting of coins, printing of currency and bank notes, non-judicial stamp papers, postage stamps, travel documents, etc.
  • The Company supplies currency/banknotes and coins to RBI, Non-judicial Stamp papers to various state governments; postal stationery and stamps to postal department; passports, visa stickers and other travel documents to the Ministry of External Affairs. Other products include commemorative coins, MICR and Non-MICR cheques etc.
  • SPMCIL has also setup a 50:50 joint venture in 2010 with Bhartiya Reserve Bank Note Mudran Pvt. Ltd. (BRBNMPL) in the name of Bank Note Paper Mill India Private Limited (BNPMIPL), a Green-field projectof  Bank Note Paper Mill with capacity of 12,000 MT per annum having two states of the art technology paper lines of 6,000 MT capacity per annum each. [Source: INDIA 2022]

Demonetisation of Banknotes

  • The government demonetised 500 and 1,000 banknotes on November 8, 2016. All 500 and 1,000 banknotes of Mahatma Gandhi series ceased tobelegal tenders in India from November 9, 2016. New 500 and 2,000 banknotes of the Mahatma Gandhi New Series in exhange for the old banknotes were announced. However, the banknote denominations of 100,50,20,10 and 5 of the Mahatama Gandhi series remained legal tender and were unaffected by the policy. The governmet said the demonetisation move was an effort to stop counterfeiting of the current banknotes allegedly used for funding terrorism, as well as a crackdown on black money in the country. [Source: INDIA 2021].

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