Banking 2020

BANKING BEYOND CLAS
Banking 2020
3
INDEX
How ATMs Work ?
6-11
Mark-to-market
12-13
Know your Indian Currency - Some Interesting Facts
Facts of Banking System in India
13-14
15-16
In drought-hit Karnataka taluks, banks convert crop loans into term loans
How PayPal Works ?
17-18
19-25
26-28
Fraudulent financiers, beware
29-31
Falling rupee: Its 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
BANKING BEYOND CLASSROOM | 11/22/2013
How Electronic Payment Works?
How Money Laundering Works

The Lehmancrisisand Indiasbadkarma
Indianhouseholdslifeafter Lehman
48-50
51-56
57-58
59-60
Theglobalfinancialcrisis: fourmythsandaquestion
61-64
How Indiasbankingsectorweatheredtheglobalstorm?
65-67
Bibliography
68
Towards a new RBI
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
An ATM is simply a data terminal with two input and four output devices. Like any
and examine the network that the ATM connects to.
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).
Most host processors can support either leased-line or dial-up machines. Leasedline machines connect directly to the host processor through a four-wire, point-topoint, 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
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.
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
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
rate would indicate a problem with the bills or with the dispenser mechanism.
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,
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.
10
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 welllighted 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.
11
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 fixedincome 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
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
Its 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 isnt 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
of stocks and bonds are available on a daily basis. Hence, the daily return on a
on a daily basis. What the matrices show are the traded prices of government
securities (G-secs) across maturities. For valuing
corporate
12
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.
13
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.
- 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
- From 2005 onwards, the year of issue is also printed in the bottom centre on the reverse
of the note
originates. As in the case of the prefix, only twenty alphabets
are
insets. The
J,
alphabets
that
are
excluded
are
I,
used
O,
X,
as
Y,
Z.
14
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.
3.
DEWAS : Inset E, F, G, H, K.
SALBONI : Inset L, M, N, P, Q.
4.
NASIK : Inset R, S, T, U, V.
- For Coins
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.
1.
15
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
-State Bank of India
its vast network in India and overseas
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
16
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.
17
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.
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 Nabards 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 Centres stipulation of 22 per cent increase over the
previous years 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.
SLBC has set up a call centre with Alsec Technologies Ltd to facilitate opening of
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
18
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
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.
forward to speedy implementation of education loan schemes. These should cover
19
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
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
You can send funds to anyone with an e-mail address, whether or not they have a
20
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
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
and confirmation process. Having your information vetted by PayPal shows both
21
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
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
payment's recipients. Though most transactions are free for the average user,
phone with text messaging to receive codes from a virtual key (the mobile service's
SMS charges apply) [source: PayPal].
22
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:
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:
Funds already transferred to your PayPal account before the transaction
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.
23
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.
24
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
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
$30 per month, or the equivalent of upgrading to a Web site payments pro account.
25
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
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.
add or withdraw any funds from your account, and you're required to go through a
26
How Electronic Payment Works

When 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).
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.
For all these methods of electronic payment, there are three main types of transactions:
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
27
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.
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
More than 12 billion ACH payments were made in 2004, a 20 percent increase from
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
28
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 ofidentity 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.
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.
Privacy concerns aside, some people simply dislike making electronic payments.
29
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
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.
assignment. For example, plantation schemes emerged in the mid-1990s outside
30
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
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.
deficiency by dispensing with the requirement of a company for a CIS. Now a
31
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.
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 SEBIs 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.
The ordinance practically eliminates the regulatory gap and thereby an unregulated
32
Falling rupee: Its 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
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 Governments
fiscal activities towards excess rupee liquidity?
An important contributor to the volatile rupee has been the Centres 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
single-most important cause for the same.
33
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 Governments
market borrowing programme through Rs 15,000 crore of bond auctions, also
witnessed high yields being demanded. The RBI the Governments 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
Centres 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 longterm sustainable basis. Monetary tightening will, through higher government bond
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 RBIs current focus is on exchange rate stability at the cost of the gro wth.
However, given that fiscal mismanagement lies at the root of the exchange rate
volatility and the latters 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.
yields, only increase the actual fiscal and revenue deficit figures for 2013-14.
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.
34
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
Governments 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.)
35
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 socialmedia savvy potential customers.
proposition. Its 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 banks 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
According to B. Sambamurthy, Director, IDRBT, young customers offer a huge value
36
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.
37
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 consumers
perspective since these add-ons make little economic sense from borrowers
perspective. Its 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 its 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
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. Its 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 Cross Sold

Product
Loan
Home
Loan
Description
This type of
insurance
Loan,
Insurance/Payme protects your
nt
monthly
Vehicle Protection
loan payments if
you
Loan
Insurance
become
unemployed or
suffer an accident
or
sickness.
Loan
Desired
features
Word Of
caution
Insurance
1. You have to
pay
high premium.
takes care of
the
EMIs in case of
death,
unemployment
etc
2. Be careful
about
the cover they
provide.
guide lines based on which they should accept or reject the offer.
38

protection
insurance is
available for home
loan,
car loan and
sometimes
for personal loans.
Life Insurance
Generic Life
Insurance
(Term/Endowment,
3. You might
have
to pay a
single
premium for
the
protection which
is
very high.
Life cover is
provided
If you already
have
substantial life
and
disability
coverage
insurance
Money back)
Mutual Fund
you do not
need
this. No
need to
pay extra
premium.
Normal mutual fund Capital
1. If you
appreciation
already
products like debt,
potential and tax have exposure
ELSS
in
etc
saving
these
reject the offer.
2. Before
saying
yes,
research about
the
return and fee
structure of the
scheme.
Dont
apply if the
returns
are not good
and
you can get it
cheaper from
other
sources.
Credit Card
Credit
card
of You get a credit 1.
various types like card

Gold, Platinum etc
with
no
You
might
extra
overspend and
documentation
get
BANKING BEYOND CLAS
39
verification
into debt trap.

2.There is a fear
of theft.
3.Chances
you
own
are
already
credit
card with same
Credit
Card
Insurance
Card Credit insurance can You get a

coverage
come in a
for demise,
variety of
disability
forms. The three
and
main
unemployment
types are credit
life,
disability,
unemployment
and
you
not
do
need another.
1. If you
already
have
life and
disability
insurance
policies,
you do not
need
this.
insurance may
not
be as cost
effective
and is not as
flexible
traditional
as
life
insurance
policies.
2. If you are
not
employed at
the
time of getting
the
unemployment
insurance you
are
paying for
a
Credit
features
coverage that
you
are not using
40
3.
Some
policies
are
limited to age
restrictions and
the
credit
insurance sales
person
Banks try to cross

sell
products and they
will
offer a credit
card on
personal loan or ask
the
person to open an
account with them
You get a credit

card
with
no
extra
documentation
and
verification
often
not
ask
your
age
but
instead will opt

1. You
might
overspend and
get
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 one.
Conclusion
Above discussion doesnt intend to doubt the intent of the bank but aims at
informing consumers regarding the incentivized up selling loophole. Its 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
Person Credit Card

al
Loan
will
mis-selling intended for incentives and enhancement of fee based income.
41
M-Pesa
M-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 voters 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
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 customers 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 MPesa 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
Money account, as part of the M-pesa service, will get facilitated within 48 hours.
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.
42
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.
43
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 NSELs 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
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.
plausible explanation from exchange authorities.
44
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
NSELs 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)
BANKING BEYOND CLAS
45
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,
providers,
technology
pioneers,
merchants,
law
enforcement
agencies
cardholders to come together. Crucially, advances in technology have
and
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?
payment platforms or the government. It is time for financial institutions, service
46
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 RBIs 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
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 Indias 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
difficult to steal data. With bankers being more aggressive in advising merchants to
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.
47
Also, while travelling overseas, it is advised to notify ones 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 : RBIs 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)
48
Towards a new RBI

The 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
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?
than 10 runs. There have been only 17 batsmen in Test history who have scored a
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
49
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
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.
value below 60. The number one achievement of these measures was to achieve
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
50
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 doubledigit 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
51
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
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
to change its form and make it difficult to follow. Layering may consist of several
trying to get a handle on the problem. In
the
United
States,
the Department
of Justice, the State Department, the Federal Bureau of

52
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.
53
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
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
complex setup relies on the fact that there are businesspeople in Colombia --
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
54
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 Eff ects 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.
55
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
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
particular areas of the economy that are desirable to money launderers create false
and hand it over to a member of the terrorist group. They send the money in
roundabout ways that allow them to fund
56
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.
57
The Lehman crisis and Indias 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 Lehmans bankruptcy, on 15 September, with the
emerging economies now fighting for survival. One cant help but wonder how
things could have gone so wrong.
In the case of India, the palliativethe massive fiscal stimulus of Rs.1.86 trillion
became the proverbial millstone around its neck. Thats 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
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 crisissomething
which, rating agencies argue, could lead to the downgrading of Indias 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 happenedand this is not unique to Indiasince 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 financethough some have
sought to pass this off as some kind of personality battle.
gross domestic product for 2008-09 actually turned out to be 6%; in the following
58
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 weatherin this case
a volatile world economyis 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 institutionstantamount 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 scandalstheir
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
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 countrys governance structure. If there is an
urgent lesson to be learnt in the luxury of hindsight, then it is precisely this:
governance reform.
optimumespecially with decisions that forced a blanket ban, where an executive
59
Indian householdslife after Lehman

Indian 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.
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.
As a result, the globally inter-connected and highly inter-dependent financial system
60
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.
61
The global financial crisis: four myths and

a question
Five 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.
Thats not all. Five years after the crisis, the once heady growth rates of the
emerging economies have plunged. Indias gross domestic product growth rate has
come down from over 9% to less than 5%. Chinas 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
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
This fond hope was destroyed early in the crisis, when emerging markets fell harder
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 twoChina and Russiathat
have current account surpluses.
62
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, sabrerattling 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
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 isnt 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 isnt the Chinese economy, where a
recovery is being attempted on the back of higher investment spending and
exports. It isnt in Europe, where loose monetary policy has papered over the cracks
and the fundamental tensions underlying the euro havent been addressed.
It isnt 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
booming, while Main Street is whimpering. What kind of a recovery is taking shape
63
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?
64
How Indias banking sector weathered the

global storm
Hours 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.
Indias largest private sector lender ICICI Bank Ltd had the maximum exposure to
Lehman Brothers$83 million, less than 0.1% of the banks 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 couldnt 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 Lehmans 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
rates.
RBI also sensed the real estate bubble ahead of other regulators.
movement started in late 2004, the banks could absorb the impact of rising interest
65
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 banks 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.
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 systems 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
Five years down the line, the Indian banking system has been hugely polarized.
with restructured debts on the rise. The combination of gross NPAs and restructured
assets in March was 9.25% of total advances.
66
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 Indias 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, Indias 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 77.5they 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 futureas RBI plans to put bank
licensing on tap the next round of battle on the Indian banking landscape will be
fought for deposits.
BANKING BEYOND CLAS
67
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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