Banking 2020

Banking 2020

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INDEXHow ATMs Work ? 6-11

Mark-to-market 12-13

Know your Indian Currency - Some Interesting Facts 13-14

Facts of Banking System in India 15-16

In drought-hit Karnataka taluks, banks convert crop loans into term loans 17-18

How PayPal Works ? 19-25

26-28How Electronic Payment Works?

Fraudulent financiers, beware 29-31

Falling rupee: It’s the Government, stupid 32-34

Banks use social media to woo youth 35-36

How Banks Cross Sell with Loans? 37-40

M-Pesa 41-42

NSEL and collateral damage 43-44

Be on guard against card fraud 45-47

Strictly For Private Circulation 4

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Towards a new RBI 48-50

How Money Laundering Works 51-56

The Lehmancrisisand India’sbadkarma 57-58

Indianhouseholds—lifeafter Lehman 59-60

Theglobalfinancialcrisis: fourmythsandaquestion 61-64

How India’sbankingsectorweatheredtheglobalstorm? 65-67

Bibliography 68

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How ATMs Work

A teacher affects eternity; he can never tell where his influence stops.

Henry Brooks Adams

You're short on cash, so you walk over to the automated teller machine (ATM), insert your card into the

card reader, respond to the prompts on the screen, and within a minute you walk away with your

money and a receipt. These machines can now be found at most supermarkets, convenience stores and

travel centers. Have you ever wondered about the process that makes your bank funds available to you

at an ATM on the other side of the country?

In this article, we will look at the ATM device that allows you access to your money and examine the

network that the ATM connects to.

An ATM is simply a data terminal with two input and four output devices. Like any other data terminal,

the ATM has to connect to, and communicate through, a host processor. The host processor is

analogous to an Internet service provider (ISP) in that it is the gateway through which all the various

ATM networks become available to the cardholder (the person wanting the cash).


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Most host processors can support either leased-line or dial-up machines. Leased-line machines connect

directly to the host processor through a four-wire, point-to-point, dedicated telephone line. Dial-up

ATMs connect to the host processor through a normal phone line using a modem and a toll-free

number, or through an Internet service provider using a local access number dialed by modem.

Leased-line ATMs are preferred for very high-volume locations because of their thru-put capability, and

dial-up ATMs are preferred for retail merchant locations where cost is a greater factor than thru-put.

The initial cost for a dial-up machine is less than half that for a leased-line machine. The monthly

operating costs for dial-up are only a fraction of the costs for leased-line.

The host processor may be owned by a bank or financial institution, or it may be owned by an

independent service provider. Bank-owned processors normally support only bank-owned machines,

whereas the independent processors support merchant-owned machines.

Parts of the Machine

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You're probably one of the millions who has used an ATM. As you know, an ATM has two input devices:

Card reader - The card reader captures the account information stored on the magnetic stripe on the

back of an ATM/debit or credit card. The host processor uses this information to route the transaction to

the cardholder's bank.

Keypad - The keypad lets the cardholder tell the bank what kind of transaction is required (cash

withdrawal, balance inquiry, etc.) and for what amount. Also, the bank requires the cardholder's

personal identification number (PIN) for verification. Federal law requires that the PIN block be sent to

the host processor in encrypted form.

And an ATM has four output devices:

Speaker - The speaker provides the cardholder with auditory feedback when a key is pressed.

Display screen - The display screen prompts the cardholder through each step of the transaction

process. Leased-line machines commonly use a monochrome or color CRT (cathode ray tube) display.

Dial-up machines commonly use a monochrome or color LCD.

Receipt printer - The receipt printer provides the cardholder with a paper receipt of the transaction.

Cash dispenser - The heart of an ATM is the safe and cash-dispensing mechanism. The entire bottom

portion of most small ATMs is a safe that contains the cash.

Sensing Bills

The cash-dispensing mechanism has an electric eye that counts each bill as it exits the dispenser. The bill

count and all of the information pertaining to a particular transaction is recorded in a journal. The

journal information is printed out periodically and a hard copy is maintained by the machine owner for

two years. Whenever a cardholder has a dispute about a transaction, he or she can ask for a journal

printout showing the transaction, and then contact the host processor. If no one is available to provide

the journal printout, the cardholder needs to notify the bank or institution that issued the card and fill

out a form that will be faxed to the host processor. It is the host processor's responsibility to resolve the

dispute.


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Besides the electric eye that counts each bill, the cash-dispensing mechanism also has a sensor that

evaluates the thickness of each bill. If two bills are stuck together, then instead of being dispensed to

the cardholder they are diverted to a reject bin. The same thing happens with a bill that is excessively

worn, torn, or folded.

The number of reject bills is also recorded so that the machine owner can be aware of the quality of bills

that are being loaded into the machine. A high reject rate would indicate a problem with the bills or with

the dispenser mechanism.

Settlement Funds

When a cardholder wants to do an ATM transaction, he or she provides the necessary information by

means of the card reader and keypad. The ATM forwards this information to the host processor, which

routes the transaction request to the cardholder's bank or the institution that issued the card. If the

cardholder is requesting cash, the host processor causes anelectronic funds transfer to take place from

the customer's bank account to the host processor's account. Once the funds are transferred to the host

processor's bank account, the processor sends an approval code to the ATM authorizing the machine to

dispense the cash. The processor then ACHs the cardholder's funds into the merchant's bank account,

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usually the next bank business day. In this way, the merchant isreimbursed for all funds dispensed by

the ATM.

So when you request cash, the money moves electronically from your account to the host's account to

the merchant's account.

ACH TRANSFERS

"ACH" is short for "automated clearing house." This bank terminology means that a person or business is

authorizing another person or business to draft on an account. It is common for fitness centers and

other businesses to ACH a monthly membership fee from member accounts, and many small businesses

use ACH for direct deposit of paychecks.

ATM Security

ATMs keep your personal identification number (PIN) and other information safe by

usingencryption software such as Triple DES (Data Encryption Standard). But there are lots of things that

you can do to protect your information and your money at an ATM.

Many banks recommend that you select your own PIN. Visa offersthe following PIN tips:

Don't write down your PIN. If you must write it down, do not store it in your wallet or purse.

Make your PIN a series of letters or numbers that you can easily remember, but that cannot easily be

associated with you personally.

Avoid using birth dates, initials, house numbers or your phone number.

Visa also recommends the following tips for safe ATM usage:

Store your ATM card in your purse or wallet, in an area where it won't get scratched or bent.

Get your card out BEFORE you approach the ATM. You'll be more vulnerable to attack if you're standing

in front of the ATM, fumbling through your wallet for your card.

Stand directly in front of the ATM keypad when typing in your PIN. This prevents anyone waiting to use

the machine from seeing your personal information.

After your transaction, take your receipt, card and money away. Do not stand in front of the machine

and count your money.


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If you are using a drive-up ATM, get your vehicle as close to the machine as possible to prevent anyone

from coming up to your window. Also make sure that your doors are locked before you drive up to the

machine.

Do not leave your car running while using a walk-up ATM. Take your keys with you and lock the doors

before your transaction.

If someone or something makes you uncomfortable, cancel your transaction and leave the machine

immediately. Follow up with your bank to make sure the transaction was cancelled and alert the bank to

any suspicious people.

Many retail merchants close their store at night. It is strongly recommended that they pull the money

out of the machine when they close, just like they do with their cash registers, and leave the door to the

security compartment wide open like they do with an empty cash-register drawer. This makes it obvious

to any would-be thief that this is not payday.

For safety reasons, ATM users should seek out a machine that is located in a well-lighted public place.

Federal law requires that only the last four digits of the cardholder's account number be printed on the

transaction receipt so that when a receipt is left at the machine location, the account number is secure.

However, the entry of your four-digit personal identification number (PIN) on the keypad should still be

obscured from observation, which can be done by positioning your hand and body in such a way that

the PIN entry cannot be recorded by store cameras or store employees. The cardholder's PIN is not

recorded in the journal, but the account number is. If you protect your PIN, you protect your account.

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Mark-to-market

The mark-to-market impact on fixed-income fund portfolios was colossal on a single day last week when

the Reserve Bank of India decided to raise the overnight bank rate by two percentage points to 10.25%.

As a result, one-day returns on net asset values (NAVs) fell sharply. Mark-to-market is essentially an

accounting concept used to reflect market returns. Bond prices fall when interest rates rise and hence

fixed-income funds posted sharp negative returns. But this may not translate into the effective return.

Here is all you need to know about the concept with respect to your investment portfolios and mutual

funds (MFs).

What is it?

Marking to market is the practice of showing assets at a value which is current or valuing the asset at the

current market price. In case of securities such as stocks and bonds held in a portfolio either on your

own or an MF, marking to market is done on a daily basis. Unlike assets held on the balance sheet of a

company, prices of stocks and bonds are available on a daily basis. Hence, the daily return on a portfolio

can be calculated accurately. Market return becomes your effective return if you sell on the day of the

fall or rise. For fixed-income funds based on accrual (daily interest accumulation) and mark-to-market

losses are made up if you continue to hold for the intended period rather than panic-selling.

How it works for debt funds

It’s easy to have equity fund NAVs marked to market as stock prices are available daily. As a result, the

daily NAV volatility in such funds can be high as it follows any small and big market movement. In case of

some fixed-income funds which hold money market securities with short term (three-six months)

maturity, the portfolios are built for accrual return (returns based on interest due on securities) rather

than taking advantage of any price change. For such money market securities the current market price

isn’t always available, especially on a daily basis. So there is a specified process and reference for valuing

securities.

In the domestic context for debt securities which are not traded daily, credit rating agencies Crisil Ltd

and Icra Ltd send out what are called valuation matrices to MFs on a daily basis. What the matrices show

are the traded prices of government securities (G-secs) across maturities. For valuing corporate


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securities a suitable mark up (or down) to G-secs is applied by the fund house based on the credit rating

or the risk profile of the security. For arriving at a suitable price the modified duration of securities is

needed; this is shown in years and tells you the change in price of a security if interest rate was to

change by one percentage point. Using this methodology illiquid securities too can be expressed at a

reflective daily price and NAVs of liquid and ultra-short term funds get calculated. Last year, the

Securities and Exchange Board of India mandated that all money market securities and bonds with a

maturity of more than 60 days need to be marked to market.

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Know your Indian Currency - Some Interesting Facts

- The first 1000/- Note was introduced in 2000 and the first 20/- and 5/- note was introduced in 2001

- Mahatma Gandhi Labeled notes stared from 1996 for new series of 10/- rupee notes...later for almost

all currency notes they added Mahatma Gandhi to notes...It is a huge tribute to him.

- 50/- notes with Mahatma released in 1997

- 100/- with Mahatma as label...released in 1996 and still continuing the same template with slight

changes in times.

- The first Mahatma Gandhi note of Rs.500 was released on 2nd October 1987 later subsequently in

1997, the new design of Rs.500 notes in the Mahatma Gandhi series was introduced during October.

- From 2005 onwards, the year of issue is also printed in the bottom centre on the reverse of the note

- The practice of year of printing of the year of issue on the reverse of the note began in 2005. The year

of issue was necessitated since the volume of notes that were printed would one day exhaust the first 3

characters of the prefix. Therefore, from year 2006, the series commenced with 00A or 01A all over

again.

- Know what is INSET

The volume of banknotes printed in India are huge which necessitated the use of inset which in the case

of Indian Banknotes are Alphabets. This inset is a capital letter and appears on the number panel.

There are FOUR different currency press that print notes for the Reserve Bank of India . Each of the

four currency printers are allotted a separate set of inset letters for their internal identification

purposes. For security reasons, the Reserve Bank of India does not reveal which inset letters are

assigned for which printing press from where it originates. As in the case of the prefix, only twenty

alphabets are used as insets. The alphabets that are excluded are I, J, O, X, Y, Z.


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The following insets have been assumed to be allotted to the four Printing press that print notes for the

RBI. There is no official notification from RBI for security reasons, the inset allocation has been

ascertained by the printer's name on the reams from the issued notes. It needs to be mentioned that all

insets are so far not been used in one or all denominations of notes printed so far.

1. MYSORE : Plain & Inset A, B, C, D.

2. DEWAS : Inset E, F, G, H, K.

3. SALBONI : Inset L, M, N, P, Q.

4. NASIK : Inset R, S, T, U, V.

- For Coins

1. Delhi - have a dot

2. Mumbai - have a diamond

3. Hyderabad - have a star

4. Kolkata - Nothing beneath the year

- the word "RUPEE" was derived from the Sanskrit word raupya, meaning "Silver".

- The 15 Launguages (Apart from English) are Assamese, Bengali, Gujarati, Kannada, Kashmiri, Konkani,

Malayalam, Marathi, Nepali, Oriya, Panjabi, Sanskrit, Tamil, Telugu and Urdu

- On July 15th 2010 Indian Rupee got its own Official Rupee Symbol and it started printing on currency

from 2011 last quarter.

- Identification mark - On the left of the watermark window, different shapes are printed for various

denominations (20: vertical rectangle, 50: square, 100: triangle, 500: circle, 1,000: diamond). This also

helps the visually impaired to identify the denomination.

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Facts of Banking System in India

The first bank in India to be given an ISO Certification

-Canara Bank

The first bank in Northern India to get ISO 9002 certification for their selected branches

-Punjab and Sind Bank

The first Indian bank to have been started solely with Indian capital

-Punjab National Bank

The first among the private sector banks in Kerala to become a scheduled bank in 1946 under the RBI

Act

-South Indian Bank

India's oldest, largest and most successful commercial bank, offering the widest possible range of

domestic, international and NRI products and services, through its vast network in India and overseas

-State Bank of India

India's second largest private sector bank and is now the largest scheduled commercial bank in India

-The Federal Bank Limited

Bank which started as private shareholders banks, mostly Europeans shareholders

-Imperial Bank of India

The first Indian bank to open a branch outside India in London in 1946 and the first to open a branch in

continental Europe at Paris in 1974

-Bank of India, founded in 1906 in Mumbai

The oldest Public Sector Bank in India having branches all over India and serving the customers for the

last 132 years

-Allahabad Bank


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The first Indian commercial bank which was wholly owned and managed by Indians

-Central Bank of India

Bank of India was founded in 1906 in Mumbai. It became the first Indian bank to open a branch outside

India in London in 1946 and the first to open a branch in continental Europe at Paris in 1974.

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In drought-hit Karnataka taluks, banks convert crop

loans into term loans

Under drought relief measures in 157 drought-affected taluks in Karnataka, both public sector and

private banks have converted 1.41 lakh crop loan accounts into term loans involving an amount of Rs

1,555.58 crore.

Addressing the 124th meeting of SLBC Karnataka, Sudhir Kumar Jain, CMD, SyndicateBank, and

Chairman, SLBC, said the banks have also lent fresh crop loans to 18,009 farmers with credit limit of Rs

216.11 crore and extended 9,196 fresh agri-term loans involving credit limit of Rs 333.29 crore.

Jain said that under urban financial inclusion (FI), wards have been allocated to banks in urban areas.

He requested all the banks to ensure at least one bank account per family coverage. SLBC has set up a

call centre with Alsec Technologies Ltd to facilitate opening of accounts for migrant labourers, street

vendors/hawkers etc.

On the SLBC targets, Jain said a target of Rs 73,361 crore is set under Annual Credit Plan for the current

fiscal, by taking into account Nabard’s priority sector credit projections. Out of the total target, the share

of agriculture credit is Rs 44,545 crore, which is in tune with the Centre’s stipulation of 22 per cent

increase over the previous year’s target.

CD RATIO

Chief Minister Siddaramaiah, who sat through the session, pointed out that Karnataka is the cradle for

genesis of five public sector banks and two private sector banks. “I am happy to note that we have 8,430

bank branches in Karnataka today with 3,295 of them located in rural areas. However, this coverage has

not resulted in increased flow of credit. While our neighbours, Tamil Nadu and Andhra Pradesh, have

maintained credit deposit (CD) ratio in the range of 117 per cent to 120 per cent, our ratio is just about

75 per cent only.”

“Even in case of rural areas, our CD ratio barely manages to cross 100 per cent, while Tamil Nadu has

been able to achieve 132 per cent and Andhra Pradesh has touched 173 per cent. We need to change


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this trend to ensure higher credit flow to economy in general and to rural economy in particular,” he

added.

The State government is committed to support primary producers for collective marketing of their

agricultural produce. “We need to increase the fund flow to producers’ organisations through banks. In

addition, commodity and region specific area development schemes would be used to strengthen the

credit take-off,” the Chief Minister said.

STUDENT LOANS

On credit flow to education sector by banks in Karnataka, the Chief Minister said at Rs 4,263 crore, it is

significantly lower than its neighbours such as Tamil Nadu Rs 11,894 crore, Kerala Rs 7,210 crore and

Andhra Pradesh Rs 5,446 crore.

“As human capital development is an essential factor for sustainable growth, I look forward to speedy

implementation of education loan schemes. These should cover large population in both rural and urban

areas to enhance skill development,” he explained.

“At present, we have four lakh SHGs, which have disbursed loans amounting Rs 5,181 crore. I am told

that in Andhra Pradesh, the number of SHGs is more than 10 lakhs with loan portfolio of more than Rs

15,000 crore,” he said.

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How PayPal Works

The idea behind PayPal is simple: Use encryption software to allow people to make financial transfers

between computers. That simple idea has turned into one of the world's primary methods of online

payment. Despite its occasionally troubled history, including fraud,lawsuits and zealous government

regulators, PayPal now boasts over 100 million active accounts in 190 markets worldwide

[source:PayPal].

PayPal is an online payment service that allows individuals and businesses to transfer funds

electronically. Here are some of the things you might use PayPal for:

Send or receive payments for online auctions at eBay and other Web sites

Purchase or sell goods and services

Make or receive donations

Exchange cash with someone

You can send funds to anyone with an e-mail address, whether or not they have a PayPal account. To

receive the funds, though, the recipient must have a PayPal account associated with that e-mail address.

Basic PayPal accounts are free, and many financial transactions are free as well, including all purchases

from merchants that accept payments using PayPal [source: PayPal].

If you have a PayPal account, you can add and withdraw funds in many different ways. You can associate

your account with bank accounts or credit cards for more direct transactions, including adding and

withdrawing money. Other withdrawal options include using a PayPal debit card to make purchases or

get cash from an ATM, or requesting a check in the mail.

In this article, we'll show you how to use PayPal, find out how the transactions are made, and learn

something about the company's history. Let's start with how to sign up for your own PayPal account.

Signing Up for PayPal


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Signing up for PayPal is quick, and doesn't even require you to enter anybank account information.

However, if you want to use many of PayPal's features, you'll need to add and verify a checking account

or credit card. To get started, just click the "sign up" link at the top of the site's home page.

At the next page, you'll choose whether you want a personal, business or premier account. If you just

plan to use PayPal for the occasional eBay auction or online purchase, a personal account is the right

choice. If you intend to use PayPal to accept payments for a business, then a business or premier

account would be more suitable. If you select a personal account, you can upgrade in the future.

From there, PayPal asks for some basic personal information: your legal first and last name, address,

telephone number and e-mail address. You'll also need to check the box indicating that you agree to

PayPal's user agreement, privacy policy, acceptable use policy and electronic communications policy.

Once you click to create your account, you'll receive an e-mail with instructions for verifying your

account and confirming your address.

From here, you should know what PayPal means when it refers to this verification and confirmation

process. Having your information vetted by PayPal shows both buyers and sellers that you are less likely

to be a scammer.

A PayPal account is verified if you've associated that account with a current bank account or credit card.

This is more than just entering account information. PayPal will ask you to follow certain steps to

complete the verification process. For a checking account, for example, PayPal will make two

micropayments to that account, usually about five cents each. Then, you'll need to enter the amounts of

those micropayments as verification.

A PayPal account is confirmed if you've completed one of three options to signal to PayPal that the

address on your account is valid. The fastest of these is to verify a bank account or credit card matching

the address you've entered as the PayPal account's address. As an alternative, you can request a

confirmation code by mail after you've had the account for 90 or more days, or you can apply for a

PayPal Extras MasterCard which confirms your address by running a credit check.

Pay Pal Infrastructure

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From a buyer's perspective, PayPal changed the way people exchange money online. Behind the scenes,

though, it didn't fundamentally change the way merchants interact with banks and credit card

companies. PayPal just acts as a middleman.

To understand what that means, consider that creditand debit card transactions travel on several

different networks. When a merchant accepts a charge from a card, that merchant pays an interchange,

which is a fee of about 10 cents, plus approximately 2 percent of the transaction amount. The

interchange is made up of a variety of smaller fees paid to all the different companies that have a part in

the transaction: the merchant's bank, the credit card association and the company that issued the card.

If someone pays by check, a different network is used, one that costs the merchant less but moves more

slowly [source: Ellis].

What part does PayPal play in all this? Both buyer and seller deal with PayPal instead of each other. Both

sides have provided their bank account or credit card information to PayPal. PayPal, in turn, handles all

the transactions with various banks and credit card companies, and pays the interchange.

PayPal makes its own money in two ways. The first is the fees they charge to a payment's recipients.

Though most transactions are free for the average user, merchants pay a fee on transactions. PayPal

also collects interest on money left in PayPal accounts. All the money held in PayPal accounts is placed

into one or more interest-earning bank accounts. An account holders doesn't receive any of the interest

gained on the money while it sits in a PayPal account.

PayPal touts its presence as an extra layer as a security feature. That's because everyone's information,

including credit card numbers, bank account numbers and address, stays within PayPal. With other

online transactions, that information is transmitted across all the networks involved in the transaction,

from the buyer to the merchant to the credit card processor.

As an added layer of security, PayPal also offers a PayPal Security Key, which is a portable device that

creates a six-digit code every 30 seconds. The user links this key to his or her eBay or PayPal account.

The six-digit code is used in conjunction with the user ID and password to create a unique security code.

This extra service requires either a one-time purchase of $29.95 for the device or a mobile

phone with text messaging to receive codes from a virtual key (the mobile service's SMS charges apply)

[source: PayPal].


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Using PayPal: Sending Funds

Though PayPal rose to stardom via eBay, one of the keys to PayPal's success has been its ability to

expand beyond that market. You can use it to send money to a friend, donate to charity and buy items

online. In order to send money using your PayPal account, you'll need one of two things:

Funds already transferred to your PayPal account before the transaction

An instant transfer account, usually a checking or savings account, from which PayPal will withdraw the

necessary funds to cover the transaction

From there, it's just a matter of knowing your recipient. To send money to a person, all you need is

the e-mail address associated with that person's PayPal account. For an organization or business, you

can usually send money from a PayPal link at its Web site.

From the sender's perspective, PayPal is a free service. In fact, if you send money directly from a

checking or savings account, there are never any fees involved. The one exception would be if you pay

for something by taking a cash advance from your credit card. While PayPal might not charge you for

this service, your credit card provider probably will.

One thing to be aware of when sending money, particularly with donations, is designating the money's

purpose. In some cases, you'll link from the recipient's Web site to a shopping cart page that

automatically makes this selection for you. If you click to "Send Money" from the PayPal Web site, you

have the following two tabs of options to indicate whether you're buying something or just sending

money:

Purchase tab with the options of Goods, Services or eBay items

Personal tab with the options of Gift, Payment owed, Cash advance, Living expense, Other

After you send money, the record of your transaction should appear on the History page at PayPal.com.

If necessary, you can search that history for a specific time in the past. If you click the "details" link for a

transaction, you can view all the details, including the amount, date, recipient and a unique transaction

ID used by PayPal to track your transaction. If you ever dispute a transaction, customer service will use

this transaction number when handling the dispute from both sides, sender and recipient.

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If a Web site only accepts credit cards and not PayPal, you can still use funds in your PayPal account to

make a purchase. To do this, you'll need to request a PayPal debit card which operates on the Master

Card network. You can use that card number with any merchant who accepts MasterCard, and the funds

will be deducted from the PayPal account. This service is free, but has a daily spending limit of $3,000.

That debit card can also be used at ATMs to withdraw up to $400 in cash daily from your PayPal account,

and it can earn 1 percent cash back on purchases if you're enrolled for PayPal Preferred Rewards

through eBay.

Using PayPal: Receiving Funds

If you want to use PayPal to receive money, you have a range of options available. If you give someone

thee-mail address associated with your PayPal account, that person can send you money from their own

PayPal account. If you're selling items on eBay, you can select PayPal as an option for accepting payment

through eBay. If you're selling from your own store or Web site, there are a number of options available

for completing sales transactions with PayPal, including the following:

Adding a PayPal "buy now" button for each item you want to sell

Integrating a PayPal shopping cart with your Web site using the PayPal application programming

interface (API)

Accepting payments offline or off-site to process later using PayPal's Virtual Terminal

When you're signed in to PayPal, click the "merchant services" tab to see all the options available to you

as a seller. Cost and availability of these services depend on which Web site payments type you've

selected for your account. You'll have the "standard" type by default as a recipient, but you can upgrade

to the "pro" type for a $30 monthly subscription fee. Merchants with a moderate to high volume of

transactions each month should choose the pro type to avoid some of the fees commonly charged by

other payment processing services, such as gateway and downgrade fees.

From the merchant services page, you can select the wizard tools to set up new "buy now" or "add to

cart" buttons for your site. This generates code you can simply copy and paste into the HTML for

your Web pages. When a buyer clicks one of these buttons, your site links to a shopping cart at PayPal's

site to complete the transaction. This takes the burden off you, as a seller, of managing how that online

shopping cart and checkout should look and function.


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For more extensive integration, including hosting a PayPal-powered shopping cart from your own site,

you'll need to use the PayPal API. If you're not savvy with computer programming or Web site

development, this is a task you'll want to delegate to someone who is. See X.com for the technical

details about the PayPal API and developing your site to integrate PayPal features.

Once you're set up to receive money, the burden is on you as the recipient to cover the transaction

costs. PayPal charges its business and premier account holders a per-transaction cost of 30 cents, plus

2.9 percent of the transaction amount. If the merchant has a higher sales volume within a month, that

percentage could drop to as low as 1.9 percent. PayPal also charges fees for exchanging between its 25

accepted currencies in international transactions. All these fees help cover PayPal's customer support

and other services reserved for business and premier customers.

The last option shown above is accepting offline and off-site payments. This means you've taken the

buyer's name and credit card information outside of PayPal. You can enter that information and process

the transaction using PayPal's virtual terminal service. This tool is available from the merchant services

page at PayPal.com. Unlike other fee-based services at PayPal, virtual terminal requires a subscription of

$30 per month, or the equivalent of upgrading to a Web site payments pro account. The per-transaction

costs mentioned above still apply in addition to this fee.

As a recipient, you can remove money from your PayPal account by making a withdrawal. These are

your options for making the withdrawal:

Transfer money to a bank account associated with your PayPal account

Request that PayPal mail you a paper check for a certain amount

Make purchases using a PayPal debit card

So far, we've covered how to send and receive money with PayPal and how PayPal accounts work. On

the next page, we'll take a closer look at the challenges PayPal has faced and the continued controversy

over its business practices.

Problems with Pay Pal

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Though PayPal does have millions of seemingly satisfied customers, not all users have had such a

pleasant experience. In fact, so many people have felt slighted by PayPal that entire Web sites exist to

discuss problems about PayPal and mock its business practices. The most prominent is PayPal Sucks.

The biggest criticism of PayPal is that it acts like abank, but it isn't regulated like one. This means that

PayPal offers none of the protection that real banks offer, and it isn't required to maintain any of the

security, customer service or dispute resolution services that banks provide. At the same time, PayPal

holds large amounts of their customers' money, makes millions of financial transactions and even offers

credit and debit cards.

So why isn't it considered a bank? In 2002, the Federal Deposit Insurance Corporation (FDIC) declared

that because PayPal didn't meet the federal definition of an entity accepting deposits as a bank, hold

any physical money or have a bank charter, it was not a bank [source: Wolverton]. In other words,

PayPal isn't a bank because it doesn't call itself a bank. As a result, most states license PayPal as a

"money service."

One of the most common problems encountered by PayPal users is the sudden and inexplicable freezing

of their accounts. If your PayPal account is frozen, you can't add or withdraw any funds from your

account, and you're required to go through a long, complicated process to verify your identity. Some

users claim that PayPal has simply seized their funds and never returned them. Other complaints against

PayPal include rude customer service representatives, a long and confusing User Agreement and loose

hiring practices that may have led to account fraud [source: PayPal Community].

Despite these criticisms, PayPal continues to be the most popular money transfer service for online

transactions.


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How Electronic Payment WorksWhen it comes to payment options, nothing is more convenient than electronic payment. You don't

have to write a check, swipe a credit card or handle any paper money; all you have to do is enter some

information into your Web browser and click your mouse. It's no wonder that more and more people

are turning to electronic payment -- or e-payment -- as an alternative to sending checks through the

mail.

In this article, we'll look at the types of electronic payment, discuss its benefits and limitations and

explain how to add e-payment capability to your Web site.

Methods and Types of Electronic Payment

An electronic payment is any kind of non-cash payment that doesn't involve a paper check. Methods of

electronic payments include credit cards, debit cards and the ACH(Automated Clearing House) network.

The ACH system comprises direct deposit, direct debit and electronic checks (e-checks).

For all these methods of electronic payment, there are three main types of transactions:

A one-time customer-to-vendor payment is commonly used when you shop online at an e-commmerce

site, such as Amazon. You click on the shopping cart icon, type in your credit card information and click

on the checkout button. The site processes your credit card information and sends you an e-mail

notifiying you that your payment was received. On some Web sites, you can use an e-check instead of a

credit card. To pay by e-check, you type in your account number and your bank's routing number. The

vendor authorizes payment through the customer's bank, which then either initiates an electronic funds

transfer (EFT) or prints a check and mails it to the vendor.

You make a recurring customer-to-vendor payment when you pay a bill through a regularly scheduled

direct debit from your checking account or an automatic charge to your credit card. This type of

payment plan is commonly offered by car insurance companies, phone companies and loan

management companies. Some long-term contracts (like those at gyms or fitness centers) require this

type of automated payment schedule.

To use automatic bank-to-vendor payment, your bank must offer a service called online bill pay. You

log on to your bank's Web site, enter the vendor's information and authorize your bank to electronically

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transfer money from your account to pay your bill. In most cases, you can choose whether to do this

manually for each billing cycle or have your bills automatically paid on the same day each month.

Benefits of Electronic Payment

Electronic payment is very convenient for the consumer. In most cases, you only need to enter your

account information -- such as your credit card number and shipping address -- once. The information is

then stored in a database on the retailer's Web server. When you come back to the Web site, you just

log in with your username and password. Completing a transaction is as simple as clicking your mouse:

All you have to do is confirm your purchase and you're done.

Electronic payment lowers costs for businesses. The more payments they can process electronically, the

less they spend on paper and postage. Offering electronic payment can also help businesses improve

customer retention. A customer is more likely to return to the same e-commerce site where his or her

information has already been entered and stored.

With all the benefits of electronic payment, it's no wonder that its use is on the rise. More than 12

billion ACH payments were made in 2004, a 20 percent increase from 2003 [ref]. The 2004 Federal

Reserve Payments Study noted that from 2000 to 2003, electronic payments grew as payment by check

declined, which suggests that electronic payments are replacing checks.

In order to better serve their customers, banks are swiftly moving to offer online bill pay services. Grant

Thornton's 2005 survey of bank executives found that 65 percent of community banks and 94 percent of

large banks offer 24/7 online bill payment [ref]. Most of these services are free to members and

coordinate easily with personal software programs such as Quicken or MS Money. Alternatively,

consumers can subscribe to online bill pay services such as Paytrust or Yahoo! Bill Pay. These services

charge a monthly fee in exchange for the convenience of paperless bill paying.

In the next section we'll discuss the concerns that some people have about using electronic payment.

A LESS TAXING WAY TO PAY

In 1996, the IRS introduced its free e-payment service, the Electronic Federal Tax Payment System. In

2004, 1.75 million people paid their taxes electronically. To sign up, all you need is your Social Security


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Number and checking account information. In addition to paying your tax bill online, you can access

your payment history and schedule tax payments for next year.

Concerns About Electronic Payment

The main drawbacks to electronic payments are concerns over privacy and the possibility of identity

theft. Fortunately, there are many safeguards available to protect your sensitive personal information

from falling into the wrong hands.

You can defend yourself against identity theft by using virusprotection software and a firewallon your

computer. You should also make sure that you send your credit card information over a secure server.

Your Internet browser will notify you when a server is secure by showing a lock or key icon. In addition,

the URL on a secure site is usually designated by the prefix "https" instead of "http." Retailers do their

part by using data encryption, which codes your information in such a way that only the key holder can

decode it.

Privacy concerns aside, some people simply dislike making electronic payments. They find the setup too

time-consuming and don't want more logons and passwords to remember. Others simply prefer the

familiarity of writing checks and dropping envelopes in the mail. Regardless of these concerns, electronic

payment will likely continue to rise in popularity.

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Fraudulent financiers, beware

A person enjoys investing in or through a regulated market. This is because a regulated market

theoretically does not have manipulated turbulence and offers a mechanism to rescue an entity in case

of exigencies. Occasionally, however, because of ignorance or greed, the person gets into unregulated

markets and receives the shock of her life. Thereafter, she does not venture to return even to regulated

markets. This scenario largely explains the stagnant investor population in the country over the last two

decades.

The unregulated market is the bane of the extant regulatory architecture. The financial market has

about a dozen regulators and each of them has jurisdiction over a defined set of elements such as

entities, activities, schemes, products. With the best of intentions, we end up with regulatory gaps, that

is, some elements remain outside the regulatory jurisdiction.

It is because either it is not possible to identify exhaustively all the elements of the market and assign

them to specific regulators, or new elements emerge after such assignment. For example, plantation

schemes emerged in the mid-1990s outside the regulatory jurisdiction and collected thousands of crores

of rupees from innocent investors.

When it reached the proportion of a scam, the law was amended in 1999 to bring plantation schemes

within the regulatory jurisdiction of the Securities and Exchange Board of India (SEBI).

BY DEFINITION

The regulatory gap also arises from the way various elements are defined in the law. For example, the

law defines ‘securities’ to mean certain identified instruments such as shares, bonds, debentures and so

on. Unscrupulous entities came up with products which were not in the list in this definition and thereby

escaped regulatory jurisdiction. When a new product surfaces, or when the Government wishes to

introduce a new product, the law is amended to include those products within the ambit of securities.

Through this approach, the legislature notices the development of new elements in the market and then

brings them within the regulatory jurisdiction through legislative interventions.


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Another approach is to define the elements in such a manner that obviates the need for frequent

legislative intervention. For example, at the time of enactment, the legislature could not possibly

visualise all intermediaries who would need to be regulated in the future. The SEBI Act, 1992, therefore,

empowered SEBI to register and regulate not only the intermediaries listed in the Act, but also

intermediaries associated with the securities market in any manner.

This allows SEBI to regulate the intermediaries who are not listed in the Act, should the need arise, and

new intermediaries that may emerge in future, without an amendment to the law. This approach leaves

no regulatory gap.

The Securities Laws (Amendment) Ordinance, 2013, promulgated on July 18, has adopted the second

approach to bridge and avoid the regulatory gaps. For example, the 1999 amendment defined the

collective investment scheme (CIS) for the first time to mean a scheme offered by a company and having

certain features.

The market came up with non-company structures that offered schemes with the very same features.

Such schemes remained out of the regulatory jurisdiction and the investors in such schemes had no

recourse. The ordinance has removed this deficiency by dispensing with the requirement of a company

for a CIS. Now a scheme offered by any person and having the specified features would constitute a CIS.

GETTING AROUND THE LAW

The law describes various elements such as CIS and chit funds in a particular manner and has assigned

these elements to different regulators. If an element, existing or emerging, does not fit any of those

descriptions, it remains outside the regulatory jurisdiction. For example, if a person pools funds in a

manner that is not a fixed deposit, insurance contract, chit fund, CIS, pension scheme, NBFC, mutual

fund, nidhi company and others which are regulated, such pooling would have remained outside the

regulatory ambit.

Taking advantage of this gap, unscrupulous entities came up with elements such as ponzi schemes, time

share schemes, gold purchase schemes, emu farming, goat farming, multi-level marketing schemes, real

estate development schemes and so on. The ordinance has removed this deficiency by providing a

sweeping definition of CIS to mean any scheme for pooling of resources.

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This is only subject to the condition that the scheme must have a corpus of at least Rs.100 crore . Thus,

any pooling of funds above Rs100 crore is a CIS. Any scheme meeting the specified features is also a CIS

irrespective of the size of the corpus.

It is still possible for unscrupulous people to come with a scheme for pooling funds involving a corpus of

less than Rs100 crore and not meeting the specified features so as to be outside the definition of CIS. To

deal with such an eventuality, the ordinance empowers SEBI to bring any scheme satisfying certain

conditions to be specified in regulations, within the definition of CIS. This means that no novel way of

raising resources can escape regulatory jurisdiction.

QUINTESSENTIAL PROTECTOR

This way of defining CIS is a precursor to the Indian Financial Code which endeavours to obviate any

regulatory gap. It defines ‘security’, for example, to mean a transferable financial instrument and

includes certain specified instruments. It would now be impossible to issue an instrument which is not a

‘security’ and remain outside the regulatory jurisdiction.

The ordinance practically eliminates the regulatory gap and thereby an unregulated market and is,

therefore, a quintessential investor protection legislation. It has a few other welcome measures such as

a special court for the speedy trial of violations of securities laws, disgorgement of unlawful gains from

miscreants and its possible distribution among the victims of the misdemeanour concerned, and

substantial enhancement of SEBI’s powers to protect the interests of investors in securities. As rightly

stated in the press release associated with the ordinance, this demonstrates the firm commitment and

resolve of the Government to curb irregularities and frauds in the securities market.

The author is Secretary, Institute of Company Secretaries of India.


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Falling rupee: It’s the Government, stupid

The stance that the RBI should take in its July 30 Monetary Policy Review Statement is being hotly

debated. Popular opinion seems to be that with the rupee is refusing to be coaxed or coerced into

behaving itself, the RBI is left with little option but resort to a tight monetary policy. However, it appears

to be a case of missing the woods for the trees.

Two specific issues come to mind. First, a the myopic concentration on global factors to the exclusion of

the role of the Government. Second, a misplaced focus of relying on on a single instrument — short-

term interest rates — to achieve multiple (and mutually conflicting) objectives, namely, growth, price

stability and exchange rates. As long as these twin issues remain unresolved, the RBI may well continue

with its ‘costly gamble’.

The falling exchange rate has been attributed to lower dollar supply in the market relative to its

demand, with the likely tapering of quantitative easing stated as the single-most important cause for the

same.

EXCESS LIQUIDITY

Other factors responsible for the dollar demand-supply mismatch in the market have been identified as:

the increasing current account deficit, net outflow of FII investments and a reduction in FDI flows. But

what about excess rupee liquidity as a determinant of exchange rate? What has been the contribution of

the Government’s fiscal activities towards excess rupee liquidity?

An important contributor to the volatile rupee has been the Centre’s Ways and Means Advances ( see

table).

The RBI, through a series of measures — hiking marginal standing facility (MSF), Open Market

Operations and hiking liquidity adjustment facility (LAF) to Rs 75,000 crore — has tried to arrest the

rupee volatility by targeting liquidity in the system. What has been the reaction of the money and bond

markets to these measures?

BOND ISSUE FAILURE

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The overnight segment rate has, in fact, marginally decreased despite these measures. The Rs 12,000-

crore worth Open Market Operations for sucking out liquidity from the system were only partially

successful (to the extent of Rs 2,500 crore) on account of high yield bids.

Similarly, T-Bill auctions worth Rs 1,900 crore, as also part of the Government’s market borrowing

programme through Rs 15,000 crore of bond auctions, also witnessed high yields being demanded. The

RBI — the Government’s debt manager — refused the high yield bids, resulting in a total rejection of the

former and a Rs 3,526 crore devolvement on the primary dealers in the case of the latter.

What explains the inefficacy of the monetary tightening measures? Given that the Centre’s deficit at 4.8

per cent of GDP for 2013-14 (Budgetary Estimate) is Rs 542,499 crore, and with much of this borrowing

still to happen in the fiscal year 2013-14, there is little wonder that the bond market is reacting in the

given manner.

A fiscally profligate government cannot be protected by a debt manager on a long-term sustainable

basis. Monetary tightening will, through higher government bond yields, only increase the actual fiscal

and revenue deficit figures for 2013-14.

It remains a moot question whether such high yields will translate into higher FII inflows, given the

expected US Government yield increases, or even whether they are desirable.

EXCHANGE RATE STABILITY

The RBI’s current focus is on exchange rate stability at the cost of the growth. However, given that fiscal

mismanagement lies at the root of the exchange rate volatility and the latter’s implication for growth as

well, we would be better off setting our domestic house in order.

There is no way we can achieve an 8-9 per cent growth rate with the current level of domestic financial

savings.

What is the way forward? We recommend a status quo to be maintained vis-a-vis policy rates in the July

30 Monetary Policy Review. Any changes in policy rates would only address the aggregate demand side.

As has been clearly enunciated above, the problem has its roots on the fiscal side, with monetary policy

being expected to clean up what essentially is a fiscal mess.


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The onus to achieve the growth objective by augmenting financial savings also rests with the financial

sector.

With wrong diagnosis come wrong policy prescriptions. It is important that the Government’s role in the

entire exchange rate volatility be well understood. While the RBI attempts to tighten liquidity, the

Government continues to infuse volatility in the liquidity through poor cash management.

The fiscal deficit figures for the remaining part of 2013-14 and the higher yields on government bonds as

a result of monetary tightening measures will only add to the domestic factors responsible for the

current macroeconomic imbroglio.

Is the RBI barking up the wrong tree, when it is trying to contain the rupee depreciation through

monetary tightening? Our hunch is, it is.

(The authors are professors at the SP Jain Institute of Management and Research, Mumbai.)

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Banks use social media to woo youth

If you are thinking of taking a loan or a term deposit, it may be useful to see what your pals on the social

media have to say.

New-age/Gen-Y customers are more inclined to trust the advice of friends and acquaintances on

financial products and services for decision-making. And, they are embracing social networking, social

bookmarking and social shopping more than ever as a medium to gather this information, share

experiences and make decisions, according to study by the Institute for Development and Research in

Banking Technology (IDRBT), an arm of Reserve Bank of India.

The study, containing guidelines and framework for use of social media by banks, has asked public

sector banks to tap business from potential customers through social media. An estimated 20 million

youth enrolled for higher education last year, and if this trend continues in next five years, banks will

have 100 million social-media savvy potential customers.

According to B. Sambamurthy, Director, IDRBT, young customers offer a huge value proposition. “It’s

cool to be on social media. It is no longer an option but a business imperative,” he feels.

This, however, does not mean that brick-and-mortar branches will disappear. The two channels can

reinforce each other. Adoption of social media for business is a win-win situation for banks as well as

customers. Customers can instantly access and obtain opinion about a bank’s product, loan rates, and

the quality of service which would help them to take a call. And both positive and negative feedback

would be available at one go.

For banks, there could be diverse gains. “It helps in differentiating banks and making them more

relevant to customers,” the IDRBT framework states.

Compared to other channels, new business leads, via consumer referrals/influences, can be obtained at

lesser cost. Access to vast personal data of customers is also a big business opportunity.

PRIVATE BANKS LEAD


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Currently, private banks are leading in the social media. According to the ‘Financial Brand’ survey of July,

ICICI Bank, HDFC Bank and Axis Bank are among the top 10 with social media presence. The services on

offer include product details, stop payment option, request for cheque books, exclusive offers, and

balance enquiry.

The scope of offerings is fast expanding.

Public sector banks are now speeding in this direction. According to RBI Deputy Governor, Anand Sinha,

social media is becoming a key component of strategy of banks to increase over all business.

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How Banks Cross Sell with Loans?If you visit a bank to apply for a personal or home loan, you might end up not just with a loan but also

two additional products. This happens because banks and financial institutions are putting more focus

on cross-selling products to their strong customer base. This cross selling strategy has gone wrong from

consumer’s perspective since these add-ons make little economic sense from borrower’s perspective.

It’s common to see salespeople misusing customer's ignorance and up-selling products even though

there is no value addition for the customer. Earlier, banks did not sell other products even though the

customer was enquiring about them, as there was no incentive for the salesperson involved. Now, banks

have introduced incentives for cross selling and it’s quite common these days that a salesperson would

be simply pushing his agenda and getting the customer to pay for it. This push towards cross-selling by

banks is aimed at increasing fee based income and retail disbursements.

Let us look at some of the add-ons being offered to borrowers and define some guide lines based on

which they should accept or reject the offer.

Famous Cross Sold Products

The table below lists most of the famous cross sold products with different types of loans. Your agent

might try to up sell these products for personal gains. It’s you who needs to decide if you want these

add-ons or not. Before saying yes, carefully examine your current financial status as you might end up

paying for the product which you do not need.

Type Of

Loan

Cross Sold Product Description Desired features Word Of caution

Home Loan This type of insurance Insurance cover 1. You have to pay

Loan, Insurance/Payment protects your monthly takes care of the high premium.

Vehicle Protection loan payments if you EMIs in case of

Loan Insurance become unemployed or death, disability, 2. Be careful about

suffer an accident or unemployment etc the cover they

sickness. Loan provide.


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protection insurance is

available for home loan, 3. You might have

car loan and sometimes to pay a single

for personal loans. premium for the

protection which is

very high.

Life Insurance Generic Life Insurance Life cover is provided If you already have

(Term/Endowment, substantial life and

Money back) disability coverage

insurance policies

you do not need

this. No need to

pay extra premium.

Mutual Fund Normal mutual fund Capital appreciation 1. If you already

products like debt, ELSS potential and tax have exposure in

etc saving these products

reject the offer.

2. Before saying

yes, properly

research about the

return and fee

structure of the

scheme. Don’t

apply if the returns

are not good and

you can get it

cheaper from other

sources.

Credit Card Credit card of various

types like Gold,

Platinum etc

You get a credit card

with no extra

documentation and

1. You might

overspend and get

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verification into debt trap.

2. There is a fear of

theft.

3. Chances are you

already own a

credit card with

same features and

you do not need

another.

Credit Credit Card Credit insurance can You get a coverage 1. If you already

Card Insurance come in a variety of for demise, disability have substantial

forms. The three main and unemployment life and disability

types are credit life, insurance policies,

disability, you do not need

unemployment this. Credit

insurance may not

be as cost effective

and is not as

flexible as

traditional life

insurance policies.

2. If you are not

employed at the

time of getting the

unemployment

insurance you are

paying for a

coverage that you

are not using


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3. Some policies

are limited to age

restrictions and the

credit insurance

sales person will

often not ask your

age but instead will

opt for insurance

on your behalf.

Personal Credit Card Banks try to cross sell You get a credit card 1. You might

Loan products and they will with no extra overspend and get

offer a credit card on documentation and into debt trap.

personal loan or ask the verification

person to open an2. There is a fear of

account with themtheft.

3. Chances are you

already own a

credit card with

same features and

you do not need

another one.

Conclusion

Above discussion doesn’t intend to doubt the intent of the bank but aims at informing consumers

regarding the incentivized up selling loophole. It’s not wrong on the part of banks to cross-sell various

products with home, auto, personal loans and credit cards if the product is suitable for the customer. At

the end of the day, banking is also a business and not social service. The real problem arises because of

mis-selling intended for incentives and enhancement of fee based income.

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M-PesaM-Pesa is a mobile money transfer and payment service provided by Mobile Commerce Solutions Ltd or

MSCL, a wholly-owned subsidiary of Vodafone group company, and ICICI Bank Ltd. You have to be a

Vodafone customer to use this facility; you need not be an ICICI Bank customer though.

So far, M-Pesa has been rolled out in Mumbai, Delhi-National Capital Region, West Bengal, Bihar,

Jharkhand and Rajasthan.

Enrolment process

First, you need to visit an M-Pesa outlet to register yourself (find an agent at Mpesa.in). There, you need

to fill up a form and provide identity and address proofs such as Permanent Account Number, passport

and voter’s identity card. You will also have to deposit a minimum amount to open the M -Pesa account.

Once you are done, you will receive an SMS with a four-digit personal identification number or PIN. Dial

*400# and then enter the PIN and your date of birth to finally activate the service.

Once the documents are verified and approved by MCSL and ICICI Bank, the Mobile Money account, as

part of the M-pesa service, will get facilitated within 48 hours.

Main features

What does it offer? Initially, only the mobile wallet facility will be activated. Under this, you will be able

to do transactions including cash deposit, money transfer to any bank account or another M-Pesa

customer’s account, recharge mobile phones and television and even pay mobile and utility bills.

The Mobile Money account will allow you to withdraw cash and send money to any person connected

with a mobile phone; this is not possible with just the mobile wallet facility.

How does it work? To deposit money physically, you can visit an authorized M-Pesa agent. You will

receive a confirmation via SMS. If you want to transfer money from your mobile to any mobile number,

dial *400# and select the appropriate item on the list displayed. You will have to enter the mobile

number that you want to send money to and then enter the amount.

Charges: You will have to make an initial deposit of Rs.200, of which Rs.100 is activation fee and will be

deducted immediately. For sending Rs.3,501-5,000 to a registered user or bank account, the fee is Rs.80;

for unregistered users, the fee for the same amount is Rs.180; for withdrawal of the same amount, it will

beRs.75. Convenience fee of Rs.10 per transaction will be charged for payment of utilities.


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Mint money take

Currently, there are several services for sending money through mobile phones. But the products and

cost are not comparable considering that services vary. Choose a product whose services serve your

needs while keeping a look out for costs.

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NSEL and collateral damage

The recent crisis at the National Spot Exchange Ltd (NSEL) and the settlement issue have sparked off a

controversy with regard to availability of underlying collateral security (commodity) and its value to pay

off the brokers and clients.

It gives rise to a simple question as to when underlying security is under the custody of NSEL in its

accredited warehouses, why is there loss or delay in settlement of dues?

The answer lies in non-availability of underlying security, i.e. stocks/commodities, which ostensibly

happened due to non-adherence to process laid down for collateral management of commodities, said

to be in the NSEL’s certified warehouses, to mitigate risks. Though the settlement guarantee fund of

exchanges indemnifies and protects investors, traders, buyers and sellers, the collateral management of

commodity (underlying security) as a reference asset is equally essential. However, the available

guarantee fund, though only of Rs 800 crore (against dues of Rs 5,500 crore) before July 31, 2013,

dipped to Rs 60 crore on August 6, 2013 without any plausible explanation from exchange authorities.

Intriguingly, the Forward Markets Commission (FMC) (the Government-directed agency to supervise the

NSEL) was also caught unawares.

A basic objective of collateral management is to mitigate risk. A collateral manager, besides

indemnifying the loss/damage of commodity kept in warehouses, provides value-added services by

testing and certifying the quality and quantity of commodities stored, particularly agri-produce, cereals

and perishable commodities.

COMMODITY DETAILS

The weight of the commodity stored is recorded alongside percentage of variations due to moisture and

climatic changes.

This helps ensure that it is tradable or lendable for the period for which its value is assessed. These vital

details are usually captured in the warehouse receipts issued by the collateral management service

provider. Most commercial banks do not lend without appointing collateral managers to protect their

lending, at little extra cost for mitigating the risks involved.


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Had investors/lenders in such dealings only insisted that the NSEL deploy a collateral management

service provider as an additional risk mitigant, perhaps the present crisis could have been avoided.

Or, at least the goods/produce would have been found available in the so-called accredited warehouses

of NSEL.The National Bulk Handling Corporation (NBHC), the leading collateral management company,

has categorically denied having handled NSEL’s warehouses except for five facilities. This proves that

NSEL had no physical control over the commodities — hence this fiasco.

The NSEL appears to have adopted the old badla system, where positions were kept open and rolled

over without tangible security.

The committee formed by the Government will probe each and every infringement by market players

and the NSEL. The lesson to be learnt is that lenders, investors and depositors should entrust the

management of commodities backed by finance to the collateral manager.

(The author is retired DGM, SBI and presently consultant & Head – Rural Enterprise, NCML)

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Be on guard against card fraud

Payment card frauds are a reality in a world that is increasingly growing cashless. Additionally, this fraud

is also migrating from more secure to less secure regions and channels.

In India, even though the Reserve Bank of India (RBI) reported a lower incidence of 8,322 cases of cyber

frauds in 2012 — a decline from 9,588 cases in 2011 and 15,018 cases in 2010 — there are two key

differences in the nature of frauds today.

One, many of the frauds in India now have a global face; two, they are increasingly being perpetrated by

organised and adept criminal communities, unlike in the past when individuals were involved.

However, if stakeholders work in tandem, the incidence of fraud can be sharply reduced. And progress

in this direction could be faster than what has been made so far.

In fact, managing fraud should not be seen as the bastion of only the banks, payment platforms or the

government. It is time for financial institutions, service providers, technology pioneers, merchants, law

enforcement agencies and cardholders to come together. Crucially, advances in technology have

brought about a suite of innovations and services that foster greater protection for consumers from

payment card frauds. Therefore, an integrated approach and induction of superior technologies is

clearly the need of the hour.

TECH TO THE RESCUE

This becomes all the more imperative in a nascent, albeit growing cashless market such as India. The

overall debit and credit card usage at the Point of Sale (PoS) has seen rapid growth. According to the

RBI, the number of transactions using debit cards at PoS was 327.5 million, a shade higher than the 320

million transactions using credit cards at PoS.

In a market with such a scale of transactions, how can all the stakeholders come together to ensure

greater protection? What has been the progress so far?


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Technology as a key enabler of fraud management: In recent years, the global payments industry has

been banking increasingly on technology not only for ease of use at the customer-end but also for

making card payments more secure.

Using state-of-the-art predictive modelling technology, MasterCard provides issuers with a real-time

predictive fraud score on all transactions at the time of authorisation. Innovations like these are steps

ahead of even the RBI’s latest mandate that credit and debit cards should be issued only for domestic

use by default and that international cards will have to be EMV chip and PIN-enabled.

CHECKING CYBER CRIME

The banking community in the country, conscious of the problem of payments fraud, has started taking

proactive steps which are laudable.

Some of the larger banks that are credit card acquirers have replaced some POS machines at merchant

establishments, following card ‘skimming’ frauds.

Further, with virtual cards now being issued by a few banks, it makes it more difficult to steal data. With

bankers being more aggressive in advising merchants to invest in security partners who will enable

secure networks for payment processes, there could be a decrease in frauds.

It is also heartening to note that some of the Police departments across various states have been

running a seven-day capsule course on cyber crimes for police stations, in association with India’s

leading software association, Nasscom.

With the course now being mandatory for all police officers, apart from those who are already part of

the cyber crime cells, it has helped local police stations investigate cases related to cyber crime,

including credit card fraud, with greater vigour.

SAFETY PRACTICES

Finally, practices adopted by customers in using credit and debit cards will go a long way in ensuring

greater card protection. For example, while shopping online, it is useful to ensure that that the Web

page address should start with “https” not “http”. The “s” that is displayed after “http” indicates that

the Web site is secure.

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Also, while travelling overseas, it is advised to notify one’s bank so that it is aware that overseas

transactions will be made. If not, the unfamiliar spending patterns could cause your bank to suspect that

your card is being used fraudulently and thus delay your card purchase approvals.

The : RBI’s latest policy and technology guidelines could mark the beginning of a new era to help check

card frauds. With banks moving towards a system that facilitates authentication for cards issued in India

and used internationally, there will be closer coordination between them and the authorised card

payment networks.

Similarly, the new guideline that allows banks to block cards via SMS if needed will make it easier to

protect consumer interests. In September 2012, it became mandatory for telecom operators offering

mobile wallets with cash-out facility to sign up customers only under a Banking Correspondent tie-up.

These measures could perhaps take time to take full effect. But they would have a long term positive

impact in driving payment card protection measures.

(The author is Area Head - South Asia, MasterCard)


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Towards a new RBIThe new RBI should, and will, follow the principle of PIR — policy informed by research.

In his first policy statement on September 5, the day he was appointed governor of the Reserve Bank of

India, Raghuram Rajan outlined his vision for monetary policy. He spoke with considerable confidence

about the monetary perils that faced India, the high inflation and the low growth. Rejecting his own

beliefs about the exclusiveness of inflation targeting, Rajan admitted that from India's and the RBI's

vantage point, inflation targeting and growth targeting were twin targets, albeit requiring different

weights at different times. This was a dream debut, a century in the very first innings.

On September 20, Rajan came in to bat again. Surprising everyone, he sounded no different to his

predecessor D. Subbarao, and no different than what the IMF would have said. The fact that he indulged

in deep IMF-speak is not necessarily indicative of scoring few runs. After all, it was as an IMF chief

economist that Rajan was prescient in his forecast that the world economy was heading towards a crisis.

But his second innings at the RBI was a dud, as he flailed about scoring (charitably) less than 10 runs.

There have been only 17 batsmen in Test history who have scored a debut century and followed it up

with a single digit score in the second innings. Not an auspicious beginning for Rajan; however, in this

select club is W.G. Grace, who scored 152 on debut and 9 in the second innings. And the betting should

be good that Rajan can be, and likely will be, an economist's Grace.

There were several inconsistencies that were responsible for Rajan's low score. What has US tapering or

no tapering got to do with Indian inflation, where most of the inflation is due to food, and when much of

the food inflation emanates from administered minimum support prices? It is true that the taper

provides incompetent governments with an excuse for their domestic failures, but for Rajan to offer this

exscuse was a snick that did not carry. He seemed to be worried about the recent rise in WPI inflation

"as the pass through of fuel price increases has been compounded by the sharp depreciation of the

rupee and rising international commodity prices". There is precious little the RBI can do about price

increases beyond its control, like domestic food and international commodity prices. And was the

depreciation of the rupee to near 70 because of the inevitable possibility of the US taper?

There were other snicks in Rajan's presentation, like the undue haste with which he raised the repo rate

by 25 basis points. Just recently, he has argued that interest rate policy is a weak instrument to

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encourage growth. This might be his view on tapering, but good central bankers around the world have

consistently believed that both fiscal and monetary policy matters, and matters for both growth and

inflation. In any case, logical consistency would dictate that a lowering of repo rates is equally

ineffective. But lowering repo rates would have helped confidence, and some investment. So why not

do it? Given the economic circumstances (see below) Rajan's attempted drive for applause as an

inflation hawk most likely backfired. Rajan could have achieved his goals better with a different

emphasis, a different speech and a slightly different policy. This is what I would have said.

My first task as RBI governor is to help resurrect the Indian economy, to gradually bring it back to its

normal and/ or potential. While estimates of normality vary, everybody admits that a 4.5 per cent GDP

growth rate is subnormal, and a 10 per cent inflation level is way above normal. Indeed, one can make a

reasoned argument that part of India's growth problem is the high inflation level. While I do not believe

in targeting the exchange rate, it is also the case that many businessmen and economists believe that a

rupee at 67 to the US dollar (value on my first day as governor) is unreal.

On July 15, the RBI initiated a series of measures to help contain the rupee to a value below 60. The

number one achievement of these measures was to achieve zilch; number two, to render impotent the

repo rate. As you know, these RBI measures were consistent with an alphabet soup — pick any three

letters and you will have a policy. MSF, CRR, SLR, LAF, etc — even I don't remember all the combinations

the RBI and/ or the ministry of finance dreamed up. Most people said on July 16 that these policies

would be a failure, and spectacularly fail they did. The rupee went as high as nearly 70, confidence was

dented severely and even fewer people believed that the government had any clue about monetary or

fiscal policy. What did the RBI achieve? A 300 basis point increase in the effective cost of funds. And this

on top of industrial growth, which has averaged -3.1, 2.9 and -3.5 per cent since April 2011!

The first and most important lesson of policymaking is the following: learn from your mistakes. To make

a mistake is human, to continue believing that the mistake was the right thing to do is arrogant

stupidity. So my first policy goal is that effective today, we are going back, monetarily speaking, to the

world that existed before the RBI's "night of the long knives", July 15.

I have been reminded by some that this action would have meant a drastic "reduction" of borrowing

rates. How can interest rates be cut by 300 basis points in one go? The same way they were raised in


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one go. A mistake is a mistake. The eventual goal is to have one policy instrument — the repo rate, and

a sensible level of the rate. This will take time, but the journey has started.

There is another objection to getting back to July 15, ex-ante. It is that given double-digit inflation,

shouldn't interest rates be raised? India's double-digit level of inflation is of paramount concern. CPI

inflation averaged 8.4 per cent in 2010. After the RBI started tightening policy rates in 2010, CPI inflation

has recorded 9, 9.9 and 12.9 in 2011, 2012 and 2013 (till August). This suggests that the Indian economy

is topsy turvy and upside down — the RBI raises interest rates and inflation goes up!

We know that killing demand should not mean higher inflation. While food inflation has zoomed up,

non-food core inflation has systematically declined — from 9.6 per cent rate in 2011 to 7.6 per cent in

August. My dream is to make the RBI the number one macro policy research organisation in India

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How Money Laundering Works

The most common types of criminals who need to launder money are drug traffickers, embezzlers,

corrupt politicians and public officials, mobsters, terrorists and con artists. Drug traffickers are in serious

need of good laundering systems because they deal almost exclusively in cash, which causes all sorts of

logistics problems. Not only does cash draw the attention of law-enforcement officials, but it's also

really heavy.Cocaine that's worth $1 million on the street weighs about 44 pounds (20 kg), while a stash

of U.S. dollars worth $1 million weighs about 256 pounds (116 kg).

The basic money laundering process has three steps:

1. Placement - At this stage, the launderer inserts the dirty money into a legitimate financial institution.

This is often in the form of cash bank deposits. This is the riskiest stage of the laundering process

because large amounts of cash are pretty conspicuous, and banks are required to report high- value

transactions.

2. Layering - Layering involves sending the money through various financial transactions to change its form

and make it difficult to follow. Layering may consist of several bank-to-bank transfers, wire transfers

between different accounts in different names in different countries, making deposits and withdrawals

to continually vary the amount of money in the accounts, changing the money's currency, and

purchasing high-value items (boats, houses, cars, diamonds) to change the form of the money. This is

the most complex step in any laundering scheme, and it's all about making the original dirty money as

hard to trace as possible.

3. Integration - At the integration stage, the money re-enters the mainstream economy in legitimate-

looking form -- it appears to come from a legal transaction. This may involve a final bank transfer into

the account of a local business in which the launderer is "investing" in exchange for a cut of the profits,

the sale of a yacht bought during the layering stage or the purchase of a $10 million screwdriver from a

company owned by the launderer. At this point, the criminal can use the money without getting caught.

It's very difficult to catch a launderer during the integration stage if there is no documentation during

the previous stages.

Money laundering is a crucial step in the success of drug trafficking and terrorist activities, not to

mentionwhite collar crime, and there are countless organizations trying to get a handle on the problem.

In the United States, the Department of Justice, the State Department, the Federal Bureau of


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Investigation, theInternal Revenue Service and the Drug Enforcement Agency all have divisions

investigating money laundering and the underlying financial structures that make it work. State and

local police also investigate cases that fall under their jurisdiction. Because global financial systems play

a major role in most high-level laundering schemes, the international community is fighting money

laundering through various means, including the Financial Action Task Force on Money Laundering

(FATF), which as of 2005 has 33 member states and organizations. The United Nations, the World Bank

and the International Monetary Fund also have anti-money-laundering divisions.

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Money- laundering Methods

In 1996, Harvard-educated economist Franklin Jurado went to prison for cleaning $36 million for

Colombian drug lord Jose Santacruz-Londono. People with a whole lot of dirty money typically hire

financial experts to handle the laundering process. It's complex by necessity: The whole idea is to make

it impossible for authorities to trace the dirty money while it's cleaned.

There are lots of money-laundering techniques that authorities know about and probably countless

others that have yet to be uncovered. Here are some of the more popular ones:

Black Market Colombian Peso Exchange This system, which the DEA calls the "largest drug money-

laundering mechanism in the Western Hemisphere" [ref], came to light in the 1990s. A Colombian

official sat down with people in the U.S. Treasury Department to discuss the problem of U.S. goods being

illegally imported into Colombia using the black market. When they considered the issue alongside the

drug-money-laundering problem, U.S. and Columbian officials put two and two together and discovered

that the same mechanism was achieving both ends. This complex setup relies on the fact that there are

businesspeople in Colombia -- typically importers of international goods -- who need U.S. dollars in order

to conduct business. To avoid the Colombian government's taxes on the money exchange from pesos to

dollars and the tariffs on imported goods, these businessmen can go to black market "peso brokers"

who charge a lower fee to conduct the transaction outside of government intervention. That's the illegal

importing side of the scheme. The money-laundering side goes like this: A drug trafficker turns over dirty

U.S. dollars to a peso broker in Colombia. The peso broker then uses those drug dollars to purchase

goods in the United States for Colombian importers. When the importers receive those goods (below

government radar) and sell them for pesos in Colombia, they pay back the peso broker from the

proceeds. The peso broker then gives the drug trafficker the equivalent in pesos (minus a commission) of

the original, dirty U.S. dollars that began the process.

Structuring deposits Also known as smurfing, this method entails breaking up large amounts of money

into smaller, less-suspicious amounts. In the United States, this smaller amount has to be below

$10,000 -- the dollar amount at which U.S. banks have to report the transaction to the government. The

money is then deposited into one or more bank accounts either by multiple people (smurfs) or by a

single person over an extended period of time.

Overseas banks Money launderers often send money through various "offshore accounts" in countries

that have bank secrecy laws, meaning that for all intents and purposes, these countries allow


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anonymous banking. A complex scheme can involve hundreds of bank transfers to and from offshore

banks. According to the International Monetary Fund, "major offshore centers" include the Bahamas,

Bahrain, the Cayman Islands, Hong Kong, Antilles, Panama and Singapore.

Underground/alternative banking Some countries in Asia have well-established, legal alternative banking

systems that allow for undocumented deposits, withdrawals and transfers. These are trust- based

systems, often with ancient roots, that leave no paper trail and operate outside of government control.

This includes the hawala system in Pakistan and India and the fie chen system in China.

Shell companies These are fake companies that exist for no other reason than to launder money. They

take in dirty money as "payment" for supposed goods or services but actually provide no goods or

services; they simply create the appearance of legitimate transactions through fake invoices and balance

sheets.

Investing in legitimate businesses Launderers sometimes place dirty money in otherwise legitimate

businesses to clean it. They may use large businesses like brokerage firms or casinos that deal in so

much money it's easy for the dirty stuff to blend in, or they may use small, cash-intensive businesses like

bars,car washes, strip clubs or check-cashing stores. These businesses may be "front companies" that

actually do provide a good or service but whose real purpose is to clean the launderer's money. This

method typically works in one of two ways: The launderer can combine his dirty money with the

company's clean revenues -- in this case, the company reports higher revenues from its legitimate

business than it's really earning; or the launderer can simply hide his dirty money in the company's

legitimate bank accounts in the hopes that authorities won't compare the bank balance to the

company's financial statements.

Most money-laundering schemes involve some combination of these methods, although the Black

Market Peso Exchange is pretty much a one-stop-shopping system once someone smuggles the cash to

the peso broker. The variety of tools available to launderers makes this a difficult crime to stop, but

authorities do catch the bad guys every now and then. In the next section, we'll take a look at two

busted money-laundering operations.

The Effects of Money Laundering

Depending on which international agency you ask, criminals launder anywhere between $500 billion and

$1 trillion worldwide every year. The global effect is staggering in social, economic and security terms.

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On the socio-cultural end of the spectrum, successfully laundering money means that criminal activity

actually does pay off. This success encourages criminals to continue their illicit schemes because they

get to spend the profit with no repercussions. This means more fraud, more corporate embezzling

(which means more workers losing their pensions when the corporation collapses), more drugs on the

streets, more drug-related crime, law-enforcement resources stretched beyond their means and a

general loss of morale on the part of legitimate business people who don't break the law and don't

make nearly the profits that the criminals do.

The economic effects are on a broader scale. Developing countries often bear the brunt of modern

money laundering because the governments are still in the process of establishing regulations for their

newly privatized financial sectors. This makes them a prime target. In the 1990s, numerous banks in the

developing Baltic states ended up with huge, widely rumored deposits of dirty money. Bank patrons

proceeded to withdraw their own clean money for fear of losing it if the banks came under investigation

and lost their insurance. The banks collapsed as a result. Other major issues facing the world's

economies include errors in economic policy resulting from artificially inflated financial sectors. Massive

influxes of dirty cash into particular areas of the economy that are desirable to money launderers create

false demand, and officials act on this new demand by adjusting economic policy. When the laundering

process reaches a certain point or if law-enforcement officials start to show interest, all of that money

that will suddenly disappear without any predictable economic cause, and that financial sector falls

apart.

Some problems on a more local scale relate to taxation and small-business competition. Laundered

money is usually untaxed, meaning the rest of us ultimately have to make up the loss in tax revenue.

Also, legitimate small businesses can't compete with money-laundering front businesses that can afford

to sell a product for cheaper because their primary purpose is to clean money, not turn a profit. They

have so much cash coming in that they might even sell a product or service below cost.

The majority of global investigations focus on two prime money-laundering industries: Drug trafficking

and terrorist organizations. The effect of successfully cleaning drug money is clear: More drugs, more

crime, more violence. The connection between money laundering and terrorism may be a bit more

complex, but it plays a crucial role in the sustainability of terrorist organizations. Most people who

financially support terrorist organizations do not simply write a personal check and hand it over to a

member of the terrorist group. They send the money in roundabout ways that allow them to fund


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terrorism while maintaining anonymity. And on the other end, terrorists do not use credit cards and

checks to purchase the weapons, plane tickets and civilian assistance they need to carry out a plot. They

launder the money so authorities can't trace it back to them and foil their planned attack. Interrupting

the laundering process can cut off funding and resources to terrorist groups.

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The Lehman crisis and India’s bad karma

Avoiding one crisis actually sowed the seeds of the present fiscal crisis

Five years ago, when the Lehman collapse triggered a domino effect across the world, emerging

economies like China, India and Brazil were celebrated for their ability to hold their own. However, the

perceptions have been dramatically reversed ahead of the fifth anniversary of Lehman’s bankruptcy, on

15 September, with the emerging economies now fighting for survival. One can’t help but wonder how

things could have gone so wrong.

In the case of India, the palliative—the massive fiscal stimulus of Rs.1.86 trillion—became the proverbial

millstone around its neck. That’s something that finance minister P. Chidambaram refers to (indirectly

indicting predecessors who oversaw the stimulus) in his moments of exasperation when fending off

vexing questions on the fiscal slippage.

The projected fiscal deficit, or gross borrowings of the Union government, of 2.5% of gross domestic

product for 2008-09 actually turned out to be 6%; in the following year there was another slippage with

the actual fiscal deficit at 6.4% as opposed to the projection of 5.5%.

Avoiding one crisis actually sowed the seeds of the present fiscal crisis—something which, rating

agencies argue, could lead to the downgrading of India’s sovereign credit rating to junk status. In short,

the country is facing up to its fiscal karma.

To be sure, however, in retrospect, things may not have come to such a pass if it had not been combined

with the policy paralysis that afflicted the Congress-led United Progressive Alliance (UPA)—it has spent

almost all of its second tenure fighting off distractions forced upon it by alleged acts of corruption in high

office.

Further, what has happened—and this is not unique to India—since the Lehman crisis is that

governments have been overwhelmed by their fiscal karma, leaving the onus of managing the economy

on the central bank. And this is structurally not sustainable. This is precisely the underlying thread of the

recent differences between the Reserve Bank of India and the ministry of finance—though some have

sought to pass this off as some kind of personality battle.

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If one was to look at the economy as an airplane, then one of the engines has effectively stopped

functioning. Obviously, manoeuvring an aircraft on one engine through turbulent weather—in this case

a volatile world economy—is not just difficult, but hazardous.

While this is a trend evident elsewhere, the India story could easily have been different. The problems

forced upon the country by the Lehman crisis were compounded by the fact that the government was

operating with an outdated governance structure that was unable to respond adequately.

And in this the UPA is particularly culpable, because some of its ministers have even sought to

undermine existing institutions—tantamount to operating with a 1970s mindset of command-control in

the 21st century. Not only did they fail to make the transition to a rules-based regime that would ensure

more transparent governance—something that would have helped avoid the raft of corruption scandals

—their defensiveness only forced a policy gridlock in the country. Several infrastructure projects,

especially roads, have been locked up precisely due to these reasons.

The consequent governance vacuum led to a more dominant role for the judiciary; decisions that would

in the normal course have been taken by the executive were now being carried out by the judiciary. The

outcome was obviously far from optimum—especially with decisions that forced a blanket ban, where

an executive action would have been far more calibrated and pragmatic.

In the final analysis, it is clear then that the Lehman crisis did two things. One, it set in motion the

makings of a fiscal crisis, which has only been compounded by the rapid slowdown of growth, squeezing

tax revenue. Second, and more importantly, it has exposed the structural flaws in the country’s

governance structure. If there is an urgent lesson to be learnt in the luxury of hindsight, then it is

precisely this: governance reform.

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Indian households—life after LehmanIndian households never had a better time before: at the end of 2007, the Indian economy was cruising

at a growth rate of about 9%, throwing up numerous opportunities of income and investments, while

the stock market was up by at least 40% for three consecutive years. There was confidence and

optimism all around. But the narrative began to change dramatically since the beginning of 2008. The

problems in the housing market in the US and its financial system started spilling over to other globally

inter-connected economies, including India. Developments in New York started affecting finances in

New Delhi.

The chain of events took a nasty turn on 15 September 2008 when Lehman Brothers, one of the largest

financial firms in the US, collapsed under its own weight and filed for bankruptcy. Within no time, the

entire financial world started falling like a pack of cards. American International Group (AIG), the largest

insurer in the world, had to be rescued and the US government had to pump money in a number of

other financial institutions.

As a result, the globally inter-connected and highly inter-dependent financial system was in the clutch of

fear and confusion, while asset prices were falling all over the world. In India, the stock market lost at

least 50% in the year 2008 alone. The S&P BSE Sensex went down by more than 10,000 points during the

year.

The world has not fully recovered from the shock till date and, in more ways than one, we are still living

in the shadow of the financial crisis of 2008.

The Indian stock markets did recover in 2009, but have still not been able to conquer the heights that

they once touched. The five years gone by have been difficult for the Indian households as well.

Investments have not yielded returns, paycheques have lost weight in many cases and high inflation is

taxing what is left.

The only saving grace for small investors in the last few years was gold. The safe haven demand pushed

up international gold prices significantly in the aftermath of the financial crisis. In India, it was also aided

by weakening of the Indian rupee. However, even gold is now beginning to lose its shine and has

corrected from its highs in the international market. Prices have been shielded in India to an extent

because of the fall in rupee and higher import duty.


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To be sure, the story of the last five years has not been uniformly bad for India. There have been a

number of twists and turns to the tale. The economic growth in India did recover sharply after the

financial crisis. However, it could not be sustained as it was primarily fuelled by excess government

expenditure, which only led to higher level of inflation. In between, there was a sovereign debt crisis in

Europe, where, unlike companies in the US, countries had to be bailed out. Developments in Europe

exacerbated the pain in the global markets and delayed the chances of recovery. On several occasions, it

looked like the world will see a replay of the 2008 crisis. But such extreme consequences were avoided

by timely policy intervention.

However, amid the global gloom and doom, India lost its way. Uncertainty in both global and domestic

environment affected prospects for India. As a consequence, even as developed economies are

stabilizing and recovering, though at a much slower than the desired pace, India is losing momentum.

Balance sheets are getting stretched for households and companies alike. The confidence that the Indian

household once showed while earning, spending and investing is now only a thing of the past and the

future depends on how the global and Indian economy shapes up. The correlation between the global

macroeconomic developments and the Indian households was, perhaps, never so explicit.

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The global financial crisis: four myths and a questionFive years after the Lehman Brothers’ collapse, the Dow Jones Industrial Average has scaled record

highs, while the S&P BSE Sensex is still well below the peak it reached in January 2008. Stock markets in

the US, the epicentre of the financial crisis, have done rather well out of it. Emerging markets, which had

nothing to do with either the housing bust in the US or the baroque financial structures that came

crashing down, have done much worse than US markets.

That’s not all. Five years after the crisis, the once heady growth rates of the emerging economies have

plunged. India’s gross domestic product growth rate has come down from over 9% to less than 5%.

China’s growth, too, has fallen. The latest purchasing managers’ indices show optimism in the developed

countries and gloom in emerging economies.

These trends, so contrary to what was expected when the crisis broke out, have busted quite a few

myths and demolished many smug assumptions. Here are a few of them:

The myth that emerging markets would decouple

This fond hope was destroyed early in the crisis, when emerging markets fell harder than markets in the

developed world. The simple reason: they had gone up much more during the boom and the carnage in

the developed markets led to indiscriminate selling by desperate investors. The decoupling thesis got its

second wind when the governments of developing nations stoked economic growth through stimulus

programmes and ultra-easy money policies in the West saw funds sweep back to emerging markets.

Now that the promise of unlimited cheap money is ending and the West is getting back on its feet,

emerging markets are again facing outflows. The fact of the matter: emerging markets are sorely

dependent on policy in the developed world.

The myth of the BRICS: from BRICS to BIITS

The boom years of 2003-07 were the heydays of the BRICS economies, which were sold to investors as

the future world leaders. The countries had little in common with each other, a fact that has become

prominent with the recent fall from grace of emerging market currencies. An International Monetary

Fund background paper, prepared for the recent G20 summit, talks instead of a new grouping of

vulnerable economies with large current account deficits. These are Brazil, India, Indonesia, Turkey and

South Africa, or BIITS. This new group includes the three BRICS members that have current account

deficits, while excluding the two—China and Russia—that have current account surpluses.


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The myth of US decline

This is a thesis that was playing out even before the financial crisis. What the crisis proved was that,

when the chips are down, the US is the only safe haven. Funds flow back to the US after every scare in

the global markets. A wobble in China, sabre-rattling in the Middle East, a threat in Europe and funds

rush back to the safety of the US. The central role of the US dollar and of the US government as the

underwriter of the global economic system has been amply illustrated by the crisis. It is the linchpin of a

global economy. New shale gas finds have strengthened the US economy. US companies are in robust

health. In short, reports of the demise of the US economy as a result of the financial crisis are greatly

exaggerated.

The myth that Main Street would trump Wall Street

The dream that international finance, with its toxic derivatives, would be reined in and the pride of place

go back to the real economy is in no danger of coming true. Immediately after the crisis erupted, there

was a rash of analyses about how the Western economies had been captured by high finance, which had

grown like a parasite upon the real economy. Well, five years after the crisis, Wall Street is booming,

while Main Street is whimpering. What kind of a recovery is taking shape in the US, where millions of

people have given up searching for a job? The simple truth is that finance is the glue that holds the

global economy together.

The Anglo-Saxon economies, in particular, have prospered on the basis of a competitive advantage in

finance. Sure, there has been an attempt made to make banks more stable through new capitalization

norms drawn up at Basel, but that is unlikely to be enough to prevent the next bubble.

The question

What then has been changed by the global financial crisis? It isn’t the US economy, because the great

hope there is that the wealth effect will make people consume more and that will lead to a recovery. It

isn’t the Chinese economy, where a recovery is being attempted on the back of higher investment

spending and exports. It isn’t in Europe, where loose monetary policy has papered over the cracks and

the fundamental tensions underlying the euro haven’t been addressed.

It isn’t in India, where there have been few attempts to effect structural change. Whatever happened to

the need to redress global current account imbalances? Is the global economy going to lurch from crisis

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to crisis as it has done since the 1990s, with bubbles in between? Is it going to be business as usual then

till the next crisis?


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How India’s banking sector weathered the global stormHours after Lehman Brothers filed for Chapter 11 bankruptcy protection in September 2008, the Reserve

Bank of India (RBI) directed the Indian arm of the US investment bank to close all transactions with

Indian banks within a day. A couple of weeks later, RBI asked banks to furnish data on their exposure to

other troubled global financial entities, including Wachovia Corp., Fortis NV, American International

Group Inc. and Washington Mutual Inc.

India’s largest private sector lender ICICI Bank Ltd had the maximum exposure to Lehman Brothers—$83

million, less than 0.1% of the bank’s consolidated balance sheet. Others like State Bank of India, Bank of

India, Bank of Baroda, Punjab National Bank and Axis Bank Ltd had very small exposure to Lehman

Brothers, which also ran a non-banking financial company in India, but its entire Rs. 800 crore capital

was invested in government securities and bank deposits. So there was very little impact on the Indian

financial system.

The trouble started in the US housing market where a lot of imprudent loans were given to borrowers

who couldn’t repay them. Loosely called securitization, these faulty loans were sliced up, mixed with

good loans and sold to other banks across the globe. Banks, insurance firms, pension funds, and even

state governments were eager buyers of those rated assets as there was plenty of money sloshing

around and interest rates were low. When the rates started rising and home prices started falling, the

bubble burst. The proliferation of derivatives on the loans affected by the meltdown in the values of the

underlying assets magnified the problem.

Like the rest of the world, India too felt the impact of the liquidity crisis that took hold after Lehman’s

collapse, as banks stopped trusting each other. But the Indian financial system largely escaped unhurt

from the immediate impact of the fall of Lehman as a conservative RBI never allowed local banks to take

excessive risks and built a safety wall brick by brick around the banking system. The process started at

the beginning of the century when the Indian central bank conducted a stress test of the banks’

investment portfolios in a rising interest rate scenario. The yield on the benchmark 10-year bond

dropped to its historic low of 4.97% in October 2003, but a year before that, RBI had advised banks to

meet the adverse impact of interest rate risk by building up an investment fluctuation reserve. So, when

a reversal of rate movement started in late 2004, the banks could absorb the impact of rising interest

rates.

RBI also sensed the real estate bubble ahead of other regulators.

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In June 2005, it directed banks to have a board-mandated policy in respect of their real estate exposure

limits, collaterals and margins. It increased the risk weight on banks’ exposure to commercial real estate

in phases to discourage them from aggressively disbursing real estate loans. Higher risk weight calls for

more capital and makes money more expensive. Similarly, the risk weight on housing loans to

individuals against mortgage of properties and consumer credit and capital market exposures was

raised.

The central bank also progressively raised the provisions for standard assets and clamped down on inter-

bank liabilities by linking a bank’s ability to borrow from other banks to its net worth or capital and

reserves. At the same time, banks and non-banks were discouraged from securitizing their exposure and

creating more liquidity.

On top of all these, RBI also resorted to strong moral suasion to dampen banks’ appetite for risk. Banks

stopped selling exotic derivatives to help corporate clients tide over currency fluctuations and closely

monitored their unhedged foreign currency exposures. As a result of all these, the credit derivatives

market has not flourished in India, but no one is complaining.

Five years down the line, the Indian banking system has been hugely polarized. While public sector

banks that roughly account for 70% of the industry are grappling with a pile of bad and restructured

assets, private sector lenders are perceived to be more prudent and seemingly know how to get their

money back from the most difficult of borrowers. Global investors are looking at both sets of banks with

a sense of exaggeration. While this is a perception issue, non-banking finance companies have come

under greater regulatory glare. As long as they are small and efficient, RBI has no problem with them,

but the regulator is unlikely to allow any of them to become a systematically important organization.

A key parameter to judge the banking system’s health is the level of its stressed assets. With corporate

earnings shrinking in a slowing economy, it is only natural that banks’ non-performing assets (NPAs)

have been growing. A rise in NPAs affects banks’ health as they do not earn anything on such assets and,

on top of that, they need to set aside a portion of their income to provide for stressed assets. At least

one Indian bank had bad loans exceeding 6% of its total advances in the quarter ended 30 June and at

six more, four of which are majority-owned by the government, gross NPAs were above 5% of advances.

The situation is complicated with restructured debts on the rise. The combination of gross NPAs and

restructured assets in March was 9.25% of total advances.


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The banks will have to set aside money to cover their restructured loans, bad assets as well as

depreciation in the value of their bond portfolio. This will erode their profitability and capital base.

Bailout as a concept is not new for the Indian financial system, but it is insignificant compared with what

we have seen in other parts of the globe. In the US, the UK and the rest of Europe, the governments

have spent billions of dollars to recapitalize banks and a major part of the banking system in these

countries is now being controlled by the government. The money spent on ring-fencing the financial

sector from the global meltdown and past local crises is a very small portion of India’s gross domestic

product.

In June, the capital adequacy ratio of Indian banks was 13.5%, out of which 10.05% was tier-I or core

capital, consisting of equity and reserves. Under international banking norms that came into play in

April, India’s banks would need Rs. 5 trillion of capital in the next five years. Indian banks will also

require more money in the form of deposits to be able to give loans as and when credit demand picks

up. In September 2008, banks lent Rs. 73.10 for every Rs. 100 worth of deposits. Now, the credit-deposit

ratio has gone up to 77.5—they are lending Rs. 77.50 for every Rs. 100 of deposits. Since the banks need

to keep 4% of deposits with RBI and buy government bonds with 23% of deposits, they need to garner

more deposits to be able to give loans when the economy is back on a high growth path. With a set of

new banks coming up next year and many more in future—as RBI plans to put bank licensing on tap—

the next round of battle on the Indian banking landscape will be fought for deposits.

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BIBLOGRAPHY

We are indebted to the following magazines, websites and newspaper along with that we are thankful

to the authors who have given us opportunity to gain knowledge.

Howstuffworks.com

Wikipedia.com

Live Mint & Washington Post

Financial Express

Economics Times

Times of India

The Business Line


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