Retail Banking

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Table of Contents

1 Bank..................................................................................................................................................61.1 What Does a Bank Mean?..........................................................................................................61.2 Central Banks.............................................................................................................................71.3 Special Purpose Banks...............................................................................................................71.4 Investment Bank........................................................................................................................81.5 Retail Banks...............................................................................................................................8

2 Retail Banking and some of the Product lines...............................................................................92.1 Accounts..................................................................................................................................10

2.1.1 Savings Bank Account.....................................................................................................102.1.2 Current Account...............................................................................................................112.1.3 Overdraft Account............................................................................................................112.1.4 Joint account....................................................................................................................122.1.5 An Individual Savings Account (ISA).............................................................................122.1.6 Retirement savings Account............................................................................................12

2.2 Deposits....................................................................................................................................122.2.1 Fixed deposits / Term deposits.........................................................................................132.2.2 Recurring Deposits...........................................................................................................132.2.3 Treasury deposits.............................................................................................................13

2.3 Cards........................................................................................................................................13Credit Cards.........................................................................................................................................14

2.3.1 Visa and Master card........................................................................................................142.3.2 Uniform shape and size....................................................................................................152.3.3 Luhn algorithm.................................................................................................................162.3.4 Major Industry Identifier..................................................................................................162.3.5 Interest charges in Credit Cards.......................................................................................172.3.6 Credit card Frauds............................................................................................................172.3.7 Life Cycle of a Payment..................................................................................................19Charge Cards....................................................................................................................................20

2.4 Money / Fund Transfer.............................................................................................................212.4.1 Bank wire transfer............................................................................................................21

2.5 Foreign exchange.....................................................................................................................232.6 Wealth management / Asset Management...............................................................................232.7 Insurance Services...................................................................................................................242.8 Mutual funds............................................................................................................................242.9 Loan products / Lending..........................................................................................................24

3 Different Means of Conducting a Banking Business..................................................................243.1 Direct banking/ Personal Banking / Branch Banking..............................................................253.2 ATM banking...........................................................................................................................253.3 Phone banking..........................................................................................................................26

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3.4 Mobile banking........................................................................................................................263.5 Internet / E-banking.................................................................................................................27

3.5.1 Security in E-banking......................................................................................................29

4 Technology in Banking..................................................................................................................304.1 Why Use Computers?..............................................................................................................304.2 Cheque Truncation System......................................................................................................324.3 Core Banking...........................................................................................................................33

5 Technological risk factors..............................................................................................................346 Retail banking products in Denmark...........................................................................................35

6.1 Retail banking..........................................................................................................................356.1.1 E-banking.............................................................................................................................356.1.2 Accounts..............................................................................................................................366.1.3 Loans and credit...................................................................................................................366.1.4 Credit cards..........................................................................................................................366.1.5 Personal Loans.....................................................................................................................366.1.6 Mortgage loans.....................................................................................................................366.1.7 Investments..........................................................................................................................376.1.8 Online trading accounts.......................................................................................................376.1.9 Pensions...............................................................................................................................376.1.10 Insurance..............................................................................................................................386.1.11 Private banking....................................................................................................................38

7 Credit Rating Agencies and Lending...........................................................................................387.1 Credit rating agencies in different geographies.......................................................................39

8 Lending...........................................................................................................................................408.1 Credit........................................................................................................................................408.2 Consumer Credit......................................................................................................................40

9 Types of Lending............................................................................................................................419.1 Secured Lending......................................................................................................................419.2 Unsecured Lending..................................................................................................................41

10 Mortgage Lending..........................................................................................................................4310.1 Mortgage lender.......................................................................................................................4310.2 Borrower..................................................................................................................................4410.3 Needs for lending / borrowing.................................................................................................44

11 Mortgage.........................................................................................................................................4411.1 Simplified Mortgage Process flow chart..................................................................................4511.2 Types of Mortgage Lenders.....................................................................................................46

11.2.1 Mortgage Banker.............................................................................................................4611.2.2 Mortgage Brokers............................................................................................................46

11.3 Mortgage Insurance.................................................................................................................47

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11.4 Repayment Schedule / Term....................................................................................................4711.5 Equated Monthly Installments (Calculation)...........................................................................4711.6 The Mortgage Loan Process....................................................................................................4711.7 The Process flow Diagram in a Mortgage Lending Process....................................................4911.8 Technology in Mortgage Industry............................................................................................50

11.8.1 Electronic Customer Relationship Management (ECRM)..............................................5011.8.2 Data Mining Systems.......................................................................................................5011.8.3 Automated Underwriting Systems (AUS).......................................................................50

11.9 Life Of A Mortgage Loan........................................................................................................5111.10 The Life of a Loan in Good Standing..................................................................................5311.11 Exceptions to Loans in Good Standing................................................................................5411.12 Foreclosure...........................................................................................................................5511.13 Bankruptcy...........................................................................................................................5511.14 Loan Servicing.....................................................................................................................56

12 A brief understanding of Mortgage Industry in different economies.......................................5612.1 India.........................................................................................................................................56

12.1.1 Important Concepts regarding mortgages in India...........................................................5712.1.2 The important concepts regarding mortgage:..................................................................5712.1.3 Refinancing......................................................................................................................57

12.2 Denmark...................................................................................................................................5712.2.1 The Balance Principle......................................................................................................5812.2.2 Property registration and the granting of a loan...............................................................5812.2.3 Foreclosure.......................................................................................................................5912.2.4 Comparison with the US system......................................................................................5912.2.5 Business...........................................................................................................................60

13 Important Terms and their meanings..........................................................................................60

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1 Bank

1.1 What Does a Bank Mean?

A bank is a financial institution licensed by a government. It may also be termed a commercial institution licensed as a receiver of deposits. Banks primary activities include Borrowing, accepting deposits and lending of money from customers. Banks are also involved in a lot of other activities like providing loans to customers (that include retail, commercial and mortgages), issuing credit cards, insurance products, mutual funds, fund transfers, wealth management solutions, asset management etc. These services and products as the case may be are evolving with the aid of technology.

Banks manage the customer’s accounts, pay out checks that have been drawn on the bank by account holders, and also perform the collection of checks deposited in their customers' accounts.

The borrowing process of banks is carried out by receiving funds in savings accounts, current accounts and receiving deposits (which are only a few of the examples), as well as through issuance of debt securities, such as bonds and banknotes (issuance of bank notes is an activity of the Central bank).

Banks offer a comprehensive variety of payment facilities, and a bank account is regarded as indispensable by the majority of governments, business enterprises, and individuals.

There are different kinds of banks in any geographical area and some of them are as listed below, the naming convention though may be different in different parts of the world.

Central Banks Special Purpose Banks Investment Banks Retail Banks

1.2 Central Banks

A central bank, reserve bank, or monetary authority is the entity responsible for the monetary policy of a country or of a group of member states. It is a bank that can lend money to other banks in times of need. Its primary responsibility is to maintain the stability of the national currency and money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a lender of last resort to the banking sector during times of financial crisis (private banks often being integral to the national financial system). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently.

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Some of the functions of a central bank are as listed below; the functions could vary in different countries depending on the regulation of the land.

Implementing monetary policy Controlling the nation's entire money supply The Government's banker and the bankers' bank ("lender of last resort") Managing the country's foreign exchange and gold reserves and the Government's

stock register Regulating and supervising the banking industry Setting the official interest rate – used to manage both inflation and the country's

exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms

1.3 Special Purpose Banks

A Special purpose bank, eg: A Development bank (DB) is an institution, created by a government for the special purpose of development, eg: housing development, industries development etc.

A Multilateral Development bank (MDB) is created by group of countries, which provides financing and professional advising for the purpose of development. DBs have large memberships including both developed donor countries and developing borrower countries. MDBs finance projects in the form of long-term loans at market rates, very-long term loans (also known as credits) below market rates, and through grants.

1.4 Investment Bank

An investment bank is a financial institution that raises capital, trades in securities and manages corporate mergers and acquisitions. Investment banks profit from companies and governments by raising money through issuing and selling securities in the capital markets (both equity, debt) and insuring bonds (e.g. selling credit default swaps), as well as providing advice on transactions such as mergers and acquisitions.

Investment banking is a fundraising method through which governments and companies issue and sell securities in order to raise capital. Two common methods of collecting funds from the public are by capital market (selling stock) and venture capital (a type of private equity). Investment banking involves both a sell side and a buy side. The former is related to trading and promoting securities, while the latter is regarding dealing with investors and funds.

Investment banking is in contrast with commercial banking, where the bank receives deposits from clients, and loans directly to individuals and organizations. It was previously illegal for a bank to be both commercial and investment in nature; however the Gramm-Leach-Bliley Act of 1999 has now legalized such a condition.

Investment banks commonly offer consulting and advisory services for clients. Topics of advice may cover circumstances such as mergers, acquisitions, public offerings, and others. Advice on financial

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issues may also touch services such as trading of commodities, derivatives, equity securities, fixed income, and foreign currencies.

1.5 Retail Banks

Retail banking refers to banking in which banking institutions execute transactions directly with consumers. These banks are for the general retail customers rather than corporations.

Some of the services offered by Retail banks are listed below.

Issuance of accounts (eg: Savings, Current) for acceptance of funds from customers. Acceptance of funds on deposits (eg: Term deposits, Current deposits, Recurring deposits) Honor payments with the help of online banking, telegraphic transfers and other methods Issuance of bank checks and bank drafts Safe custody of important documents and other valuable items in safe deposit vaults or safe

deposit boxes Providing retail loans, commercial loans and mortgage loans to the general public and

organizations. These loans could be installment loans, overdrafts or others Issuance of banknotes, such as promissory notes Offering performance bonds, guarantees, letters of credit, and other types of documents related

to underwriting commitments for securities Brokerage services related to the Capital Markets. Foreign exchange services Act as brokers for Mutual Funds Insurance products from insurance agencies, with which they have a tie up or an agreement.

The services offered by the banks are evolving with many new product lines being added to the list and this is due to the competition to serve the customer and achieve a larger market share. The technological advancement in the banking industry only helps in this motive of the banks.

There are different types of retail banks in various economies of the world and a few types are as listed below.

Postal savings banks Commercial banks Community banks Private banks Savings banks Community development banks Offshore banks Building societies Islamic Banks

Retail banking aims to be the one-stop shop for as many financial services as possible on behalf of retail clients. Some retail banks have even made a push into investment services such as wealth

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management, brokerage accounts, private banking and retirement planning. While some of these ancillary services are outsourced to third parties (often for regulatory reasons), they often interwine with core retail banking accounts like checking and savings to allow for easier transfers and maintenance

In a more understandable terminology, the Retail banking could also be known as “Banking services offered to the general public”. In contrast with Wholesale Banking or corporate banking, retail banking is a high volume business with many service providers competing for market share. Some retail banking services, for example, credit cards, are among the most profitable services offered by financial institutions and because of competition; the benefits of such services could vary from bank to bank.

2 Retail Banking and some of the Product lines Accounts Deposits (Though a type of account, this is categorized separately due to its wide reach) Cards – Credit Cards Money / Fund Transfers Foreign Exchange Wealth Management / Asset Management services Insurance Services Mutual Funds Loans Products

2.1 Accounts

A bank account is a financial account with a banking institution, recording the financial transactions between the customer and the bank and the resulting financial position of the customer with the bank.

Broadly, accounts opened with the purpose of holding credit balances are referred to as deposit accounts; whilst accounts opened with the purpose of holding debit balances are referred to as loan accounts.

Some accounts are defined by their function rather than nature of the balance they hold. Bank accounts designed to process large numbers of transactions may offer credit and debit facilities and therefore do not sit easily with a polarized definition. These transactional accounts are called by different names in different countries: in the U.S. and Canada, they are called "checking accounts"; in the UK, they are termed "current accounts".

There are so many options now available to savers that it is difficult to know where to begin. What sort of savings account is best for you depends upon several factors - for example, how long you can tie your cash up for, how quickly you are likely to need access and whether you pay tax or not and these

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are only a few of the options. Without going into a very large array of account types, lets only see a few of the Bank accounts that are by and large the most widely available across geographies and a few value added types provided by banks.

2.1.1 Savings Bank Account

Savings Bank Accounts are meant to promote the habit of saving among the citizens while allowing them to use their funds when required. The main advantage of Savings Bank Account is its high liquidity and safety. On top of that Savings Bank Account earns moderate interest too. The rate of interest is decided and periodically reviewed by the respective central banks in any country.

Most of the banks would pay interest to you on the minimum balance held between the 10th and 30th/31st of every month, though this could vary from country to country based on the regulations of the central bank.

Now let's see a simple example from our own accounts, the normal Indian savings account holder.

Suppose you have nil in your account as on April 10 th. On April 11th you deposit Rs.100, 000 in your account. If you withdraw the funds on May 31st, there is no interest paid to you for the entire term of 51 days.

You may wonder why but the reason according to the bank's calculation is that the minimum balance between April 10th (nil) and April 30th (Rs 100,000) is nil, so no interest is paid for April. Similarly between May 10th (Rs 100,000) and May 31st (nil), the minimum balance is nil and hence you earn no interest for May as well.

Basically it implies that the bank gets to use your money for 51 days free of cost. Therefore, the banks have the option of leveraging these zero-cost funds and lend them at higher rates of interest. This is one of the most important sources of their profits.

2.1.2 Current Account

They may also be called Checking account or Transactional account in different parts of the world, and are primarily meant for businessmen, firms, companies, and public enterprises etc. that have numerous daily banking transactions. Current Accounts are cheque operated accounts meant neither for the purpose of earning interest nor for the purpose of savings but only for convenience of business hence they are non-interest bearing accounts. In a Current Account, a customer can deposit any amount of money any number of times. He can also withdraw any amount as many times as he wants, as long as he has funds to his credit. Generally, a higher minimum balance as compared to Savings Account is required to be maintained in Current account.

As per Central banks directive banks are not allowed to pay any interest on the balances maintained in Current accounts. However, in case of death of the account holder his legal heirs are paid interest at the rates applicable to Savings bank deposit from the date of death till the date of settlement. Because of

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the large number of transactions in the account and volatile nature of balances maintained, banks usually levy certain service charges for operating a Current account.

2.1.3 Overdraft Account

The word overdraft means the act of overdrawing from a Bank account. In other words, the account holder withdraws more money from a Bank Account than has been deposited in it. This account is only available to a few customers who are pre-approved based on their financial transactions with the bank.

2.1.4 Joint account

Though cannot be listed as a separate type of account, this account is offered by most of the banks as a value added benefit to its customers. A bank account shared by two or more individuals is a joint account. Any individual who is a member of the joint account can withdraw as well as deposit cash to the account. Usually, joint accounts are shared between close relatives or business partners. This joint account could be on any of the account types like savings, current or even loan products.

Joint accounts are often created in order to avoid probate. If two individuals open a joint account and one of them dies, the other person is entitled to the remaining balance and liable for the debt of that account.

A Joint Account is a temporary bank account normally being used between 2 parties entering into a transaction where 1 party needs a security for the fulfillment of the transaction and the other party has to pay the sum (deposit), being the security for the other party. Any payment from the Joint Account or return of the deposit from the joint account will only be possible if both parties sign a joint written instruction to the bank. It is not possible that only one of the both parties gives instruction for payments of the joint account. Because (European) banks are not very interested in opening joint accounts, because they are normally used for one transaction only, there are specialized parties or companies, taking care of such accounts as trustees. A joint account will normally be closed or ended after the foreseen transaction has been closed and ended. Joint accounts are used in transactions were large sums of money are involved and a very useful alternative for letters of credit or escrow accounts

2.1.5 An Individual Savings Account (ISA)

This is a financial product available to residents in the United Kingdom that replaced the TESSA (Tax-Exempt Special Savings Account). It is designed for the purpose of investment and savings with a favorable tax status.

2.1.6 Retirement savings Account

There are many banks in US and other parts of the world that offer an array of choices that can keep pace with the retirement investing needs as they evolve and grow for their esteemed customers. Though the products and their features may be different in different economies, there is always an innovation in the service offered by the banks.

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2.2 Deposits

Bank Deposits include money invested in insured bank accounts, some of which could be Fixed Deposits, Term Deposits, Certificates of Deposit, Treasury deposits and others.

2.2.1 Fixed deposits / Term deposits

Most of the banks across the globe, offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years. The term "fixed" in Fixed Deposits (FD) denotes the period of maturity or tenor. Therefore, the depositors are supposed to continue such Fixed Deposits for the length of time for which the depositor decides to keep the money with the bank. However, in case of need, the depositor can ask for closing (or breaking) the fixed deposit prematurely by paying a penalty (usually of 1%, but some banks even do not charge any penalty).

2.2.2 Recurring Deposits

These kinds of deposits are most suitable for people who do not have lump sum amount of savings, but are ready to save a small amount every month. Normally, such deposits earn interest on the amount already deposited (through monthly installments) at the same rates as are applicable for Fixed Deposits / Term Deposits. These are best if you wish to create a fund for your child's education or marriage of your daughter or buy a car without loans.

Under these types of deposits, the person has to usually deposit a fixed amount of money every month (usually a minimum of Rs.100/- p.m., the Indian scenario and this could vary depending on the banks in every country). Any default in payment within the month attracts a small penalty. However, some Banks besides offering a fixed installment RD, have also introduced a flexible / variable RD. Under these flexible RDs the person is allowed to deposit even higher amount of installments, with an upper limit fixed for the same e.g. 10 times of the minimum amount agreed upon.

Such accounts are normally allowed for maturities ranging from 6 months to 120 months. A Pass book issued where the person can get the entries for all the deposits made by him / her and the interest earned. Premature withdrawal of accumulated amount permitted is usually allowed (however, penalty may be imposed for early withdrawals). These accounts can be opened in single or joint names. Nomination facility is also available, which means that in the untimely death of the account holder, the relative whose has been nominated by the account holder will receive the money.

2.2.3 Treasury deposits

These treasury deposits are particularly useful if you have funds to invest, but would like to be able to access them quickly when required, or are unsure as to when you’ll need them again. The interest rate is variable and depends on the regulations of the banks.

2.3 Cards

There are a variety of cards available in the current banking system. Some of these card products include Credit cards, Debit Cards, ATM cards, Charge Cards, Prepaid cards, Smart Cards, Cheque

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guarantee cards etc.,

We will discuss the Credit cards which are widely used by a majority of the banks customers and is one of the very important money earners for a bank.

Credit CardsIn financial term, credit card is a financial instrument, which can be used again and again to purchase goods or borrow money and use services on credit, up to a pre-defined limit. Credit cards could be included as a product under the Loan product line, because these are kind of short term loans from the bank, with an option to pay back at a later date in installments. But considering the size of the customer base, the scope of business for banks (note that this is a major profit center in banking business) and the banks having separate divisions created to manage these set of customers, they have been listed here as a separate product line. These Cards operates on the simple principle of "BUY NOW and PAY LATER". Credit cards are also popularly known as Plastic Money and facilities the holder to buy products / services on credit, and then pay later on within about 45 to 50 days. You can pay back the amount due within the credit period allowed or you can pay the minimum balance (ranging between 5-10 per cent) and pay the rest later on which the bank charges interest at about 3 per cent p.m.( which could again vary from country to country). The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.

There are different types of Credit cards used / popular in different countries across the globe. Some of such credit cards are: Secured Credit Cards, Travel Credit Cards, Rewards Credit Cards, Airline Credit Cards, Business Credit Cards, Cash Back credit cards, Instant Approval Credit cards, Low Interest Credit Cards

2.3.1 Visa and Master card

Visa Inc., commonly referred to as VISA (Visa International Service Association), is a multinational corporation based in San Francisco, California, USA. The company operates the world's largest retail electronic payment network, managing payments among financial institutions, merchants, consumers, businesses and government entities. .

In 2006, according to The Nilson Report, Visa held 44% of the credit card market share and 48% of the debit card market share in the United States.

Visa has been at the forefront of electronic payments since its inception. From the first revolving credit card platform to neural networks and mobile payments, Visa has pioneered the growth and development of this fast-moving industry. Visa’s payment platforms are increasingly the backbone of global commerce, enabling the swift and secure transfer of value and information among financial institutions, individuals, businesses and government entities.

Visa provides financial institution customers with a comprehensive suite of electronic payment products and services. Visa's product platforms encompass credit, debit, cash access and prepaid products for consumers, businesses and governments.

Visa product platforms enable customers to develop and customize their own payment programs to meet the needs of their geographic markets. Visa also offers customers issuer processing in support of

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debit and prepaid platforms.

Visa also offers a broad range of value-added services such as enhanced risk management, dispute processing, loyalty and other information-based services, which are enabled by a centralized global processing platform.

MasterCard Worldwide is a multinational corporation based in Purchase, New York, United States. Throughout the world, its principal business is to process payments between the banks of merchants and the banks of purchasers that use its "MasterCard" brand debit and credit cards to make purchases. MasterCard Worldwide has been a publicly traded company since 2006. Prior to its initial public offering, MasterCard Worldwide was a membership organization owned by the 25,000+ financial institutions that issue its card.

It was originally created by Raymond Tanenhaus and Stanley Benovitz, two entrepreneurs in Louisville, KY, and later sold in 1966 to United California Bank (which did go through a lot of merger) as a competitor to the BankAmericard issued by Bank of America, which is now the VISA credit card and issued by Visa Inc.

2.3.2 Uniform shape and size

Ever notice all your credit cards are of Uniform shape and size? Their dimensions are governed by the ISO 7810 standard, an international standard for identification cards. Banking cards, as well as driver’s licenses and retail cards, follow ID-1 (passports follow ID-3). If your card has a smart chip, it follows ISO 7816, and if it has RFID, it follows ISO 14443

2.3.3 Luhn algorithm

Credit card numbers conform to the Luhn algorithm, which is just a simple checksum test on the number. What you do is start from the right and double each second digit (1111 becomes 2121), then add them all together, and you should end with a number evenly divisible by ten. If it doesn’t, it’s not a valid credit card number.

The formula verifies a number against its included check digit, which is usually appended to a partial account number to generate the full account number. This account number must pass the following test:

Counting from the check digit, which is the right most, and moving left, double the value of every second digit.

Sum the digits of the products together with the undoubled digits from the original number. If the total ends in 0 (put another way, if the total modulo 10 is congruent to 0), then the number

is valid according to the Luhn formula; else it is not valid.

As an illustration, if the account number is 49927398716, it will be validated as follows:

Double every second digit, from the rightmost: (1×2) = 2, (8×2) = 16, (3×2) = 6, (2×2) = 4, (9×2) = 18

Sum all the individual digits (digits in parentheses are the products from Step 1): 6 + (2) + 7 + (1+6) + 9 + (6) + 7 + (4) + 9 + (1+8) + 4 = 70

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Take the sum modulo 10: 70 mod 10 = 0 (means the sum is divisible by 10); the account number is valid. Is yours a valid credit card number? Try it out yourself

2.3.4 Major Industry Identifier

The first digit of the number is the Major Industry Identifier. 1/2 is for airlines, are for travel/entertainment, 4/5 for banking and financial, 6 for merchandising and financial, 7 for petroleum, 8 for telecommunications. 0 and 9 are for other assignments but you’ll likely never see them.

If you look at an American Express card, you’ll see it starts with a 3, a throwback to their travel/entertainment roots.

The first six digits will correspond to the issuer, including the major industry identifier. 34xxxx/37xxxx is for American Express, 4xxxxx is for Visa, 51-55xxxx is for MasterCard, and 6011xx is for Discover. The rest of the digits (except the last one, which is a checksum digit) are your account number.

2.3.5 Interest charges in Credit Cards

Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.

For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement and could be different in different countries.

The general calculation formula most financial institutions use to determine the amount of interest to be charged is

APR x ADB x number of days revolved. 100 365

Where APR = Annual Percentage RateADB = Average Daily BalanceNumber of days revolved = Number of days the amount revolved before the payment was made

Note: The number of day in a year could vary depending on the regulations of the central banks in the

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respective regions.

Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid...i.e. when the balance stopped revolving).

2.3.6 Credit card Frauds

Credit card fraud is a wide-ranging term for theft and fraud committed using a credit card or any similar payment mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying, or to obtain unauthorized funds from an account. Credit card fraud is also an adjunct to identity theft

Account numbers are often embossed or imprinted on the card, and a magnetic stripe on the back contains the data in machine readable format. Fields can vary, but the most common include:

Name of card holder Account number Expiration date Verification/CVV code (CVV stands for Card Verification Value)

The mail and the Internet are major routes for fraud against merchants who sell and ship products, and impacts legitimate mail-order and Internet merchants.

One of the most prevalent fraud methods to collect account details is Skimming. Skimming is the theft of credit card information used in an otherwise legitimate transaction. It is typically an "inside job" by a dishonest employee of a legitimate merchant. The thief can procure a victim’s credit card number using basic methods such as photocopying receipts or more advanced methods such as using a small electronic device (skimmer) to swipe and store hundreds of victims’ credit card numbers. Common scenarios for skimming are restaurants or bars where the skimmer has possession of the victim's credit card out of their immediate view. The thief may also use a small keypad to unobtrusively transcribe the 3 or 4 digit Card Security Code which is not present on the magnetic strip.

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2.3.7 Life Cycle of a Payment

Life cycle of a online payment using a credit card and the Step by Step description of the activity, an example.

Step 1: The merchant submits a credit card transaction to the Authorize.Net Payment Gateway (one of the many payment gateway service providers) on behalf of a customer via secure Web site connection, retail store, MOTO center or wireless device.

Step 2: Authorize.Net (A Payment Gateway service provider) receives the secure transaction information and passes it via a secure connection to the Merchant Bank’s Processor.

Step 3: The Merchant Bank’s Processor submits the transaction to the Credit Card Network (a system of financial entities that communicate to manage the processing, clearing, and settlement of credit card transactions).

Step 4: The Credit Card Network routes the transaction to the Customer’s Credit Card Issuing Bank.16

Step 5: The Customer’s Credit Card Issuing Bank approves or declines the transaction based on the customer’s available funds and passes the transaction results back to the Credit Card Network.

Step 6: The Credit Card Network relays the transaction results to the Merchant Bank’s Processor.

Step 7: The Merchant Bank’s Processor relays the transaction results to Authorize.Net.

Step 8: Authorize.Net stores the transaction results and sends them to the customer and/or the merchant. This step completes the authorization process – all in about three seconds or less!

Step 9: The Customer’s Credit Card Issuing Bank sends the appropriate funds for the transaction to the Credit Card Network, which passes the funds to the Merchant’s Bank. The bank then deposits the funds into the merchant’s bank account. This step is known as the settlement process and typically the transaction funds are deposited into your primary bank account within two to four business days.

A charge back is an event in which money in a merchant account is held due to a dispute relating to the transaction. Charge backs are typically initiated by the cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

Charge Cards

Charge cards, also called travel and entertainment cards, are a little different from credit cards. Charge cards, such as American Express and Diners Club, have no credit limit. You can usually charge as much as you want, but are required to pay off your entire balance when your bill arrives.

It is similar to a credit card, except that the contract with the card issuer requires that the cardholder must each month pay charges made to it in full—there is no "minimum payment" other than the full balance. Since there is no loan, there is no official interest. A partial payment (or no payment) results in a severe late fee (as much as 5% of the balance) and the possible restriction of future transactions and risk of potential cancellation of the card.

In contrast, a credit card is a revolving credit instrument which does not need to be paid off in full; no late fee is charged as long as the minimum payment is made, which carries a balance forward as a loan charging interest. Many people are not aware of this distinction however, and often the two terms are used interchangeably to describe any card which can be used as payment.

Many charge cards have the option for users to pay for some purchases over time. Eg: American Express charge card customers, for instance, can enroll in the Extended Payment Option (internally referred to as EXPO) to be able to pay for purchases over $200 over time, or in Sign & Travel to be able to pay for eligible travel-related expenses over time. These are only examples.

2.4 Money / Fund Transfer

Money Transfer or Wire transfer or credit transfer is a method of transferring money from one person

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or institution (entity) to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office.

Other Electronic Transfers

There are forms of electronic transfer that are distinct from wire transfer. EFTS (Electronic Funds Transfer System) is one such system. This is the system you use when you give your bank account number and routing information to someone you owe money and that party transfers the money from your account. It is also the system used in some payments made via a bank's online bill payment service. EFTS transfers differ from wire transfers in important legal ways. An EFTS payment is essentially an electronic personal check, whereas a wire transfer is more like an electronic cashier's check.

2.4.1 Bank wire transfer

Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is effected as follows.

The person wishing to do a transfer (or someone who they have appointed and empowered financially to act on their behalf) goes to the bank and gives the bank the order to transfer a certain amount of money. IBAN (International Bank Account Number) and BIC (Bank Identifier Code) code are given as well so the bank knows where the money needs to be sent to.

The sending bank transmits a message, via a secure system (such as SWIFT or Fed wire), to the receiving bank, requesting that it effect payment according to the instructions given.

The message also includes settlement instructions. The actual transfer is not instantaneous: funds may take several hours or even days to move from the sender's account to the receiver's account.

Either the banks involved must hold a reciprocal account with each other, or the payment must be sent to a bank with such an account, a correspondent bank, for further benefit to the ultimate recipient.

Banks collect payment for the service from the sender as well as from the recipient. The sending bank typically collects a fee separate from the funds being transferred, while the receiving bank and intermediate banks through which the transfer travels deduct fees from the money being transferred so that the recipient receives less than when the sender sent.

Banks collect a cost for the transfer effected as a transaction charge depending on the kind of transfer.

Real Time Gross Settlement

Real time gross settlement systems (RTGS) are a Electronic funds transfer mechanism where transfer of money takes place from one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one

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basis without bunching with any other transaction. Once processed, payments are final and irrevocable.

How does RTGS work?

The RTGS System is an electronic gross settlement system (i.e. settlement of transactions by transfer)

Payment orders could be initiated only by the paying participant while the Central bank can debit and credit participants’ accounts (i.e. commercial banks and primary dealers)

Payment instructions will be submitted by SWIFT – a payment message gateway. The paying bank will send the payment message to the Central Bank through the SWIFT network using a computer based terminal.

All payment instructions sent to the RTGS system will be processed and settled individually throughout operating hours;

Under normal circumstances, payments will be debited to the paying participant’s Settlement Account and reach its receiving participant within seconds provided that the sending bank has sufficient balance in its account to make the payment. This makes the funds immediately available to the receiver;

Participants may assign one of several predefined priorities to their payment orders; Each payment instruction will be settled individually on a first in first out basis (FIFO) in

accordance with their priority and the order of arrival, without netting debits against credits; If the balance in the Settlement Account of the sending members is insufficient to settle the

payment, payment orders will be queued pending incoming payments or until daylight (intraday) liquidity facility is made available to the participants by the Central Bank.

When the system cannot settle payments through the normal sequential settlement process, the gridlock resolution will clear backlogs of queued payment orders;

The RTGS system will have international standards for risk control in large value fund transfer systems;

Participants could utilize the Central Bank’s Intra-day Liquidity Facility; Offers premium payment and settlement services. All participants can monitor the status of

their accounts and payments in real time, make enquiries and manage their queues via their participant browser workstation

If there are no payment orders in the payment queue with the same or high priority and the particular participant has enough funds to settle the payment, the System will settle that payment immediately by debiting the paying participant’s account and crediting the receiving participant’s account simultaneous within a few seconds.

2.5 Foreign exchange

There are no central exchange headquarter for foreign exchange because it is an open market where dealers negotiate their own price feeds through proprietary platforms. The main geographic trading center however, is in London, followed by New York, Tokyo, Hong Kong and Singapore.

Foreign exchange banks throughout the world participate and play a big role in forex, although their roles have been greatly reduced from yesteryear. John Atkin points out in his book The Foreign Exchange Market of London that "The Bank had long used a mixture of nods, winks and arm twisting

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to influence the behavior of participants in the domestic money and banking markets." It is no secret that Foreign exchange banks dominate the top level of access for the best Forex spread. Using their big pool of clients along with their own accounts, inter-bank market made up more than half of all Forex transactions

Banks have different forex products like Travelers cheques, foreign currency cash, foreign currency drafts, overseas cheque deposits etc.

Banks do not have total control over foreign exchange rates as they fluctuate according to as actual monetary flow, budget, trade deficits, changes in GDP growth and interest rates and other economic conditions. In foreign exchange platforms, virtually everyone get access to major news at the same time, and banks are no different. Nevertheless, banks still gain the upper hand from monitoring the trend of their customers' order flow.

Apart from normal banks, central banks also participate in the foreign exchange market to regulate currencies in protection of their economy. Central banks or and national banks serve a dominant role in controlling inflation, interest rates and money supply. Since a country's currency rates have direct implications on its economy through the trade balance, almost all central banks tend to intervene to influence the value of their currencies. This is known as managed float.

2.6 Wealth management / Asset Management

The wealth management solution offers a unique combination of an extensive portfolio of functions with impressive flexibility that enables end-to-end processing of investment products from diverse asset classes including structured deposits, structured notes, bonds and mutual funds for the banks customer's.

Financial institutions and Banks are leveraging the wealth management and asset management to launch new products-such as dual currency deposits, principal protected deposits, range accrual deposits and mutual funds - with a distinct time-to-market advantage to reach out to the customers and provide value added service to them. The solutions are these days integrated with the core banking and CRM solutions, to ensure unique customer definition, a single, unified view of the customer's portfolio across asset classes and seamless flow of transactions. This helps banks capitalize on their customer base to create additional revenue streams, by offering HNWI (High Net Worth Individuals) and the mass affluent extended products and services.

2.7 Insurance Services

With the passage of time, banks have also started to sell insurance and there are governments which have enacted bills or laws in this regards.

Banks across the globe have tied up with Insurance companies or have their own subsidiary companies created to sell insurance products to their customers as value added services and have created a separate line of business.

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Eg: The passage of the Gramm-Leach-Bliley Act in the US, banks there have been provided the authority to sell insurance. These days’ bankers and agents are increasingly being thrown together, either as competitors or partners.

2.8 Mutual funds

A third of all mutual funds are now sold through banks. In addition to checking and savings deposits and CDs, banks often offer investments in mutual funds. While mutual funds are often used to invest in stocks and bonds, a major chunk of total assets is invested in money market funds.

2.9 Loan products / Lending

To meet the growing financial requirements of the customers, banks offer a wide range of loans. In order to earn high profits and remain in the competition, banks have started bringing loans to customers' doorstep. With professional experience and teams of experts, banks offer a complete package to meet all the housing finance needs and help to realize dreams into reality.

For eg: Housing or Mortgage loans (which will be covered in detail in the later section) Car loans Personal loans Consumer durable loans Education loans Loans against share Financing against gold etc.,

3 Different Means of Conducting a Banking BusinessListed below are the different ways of conducting the banking transactions

Direct banking/ Personal Banking / Branch Banking ATM banking Phone banking Mobile banking Internet /E-banking

3.1 Direct banking/ Personal Banking / Branch Banking

Before the advent of computers in banks, people used to go to the bank in person to do all transactions and use the services of the bank. Bank Tellers were the front line people who resolve customer queries, payment transactions and a host of other functions. However with the technological revolution in banking industry, many people have stopped going to banks and conduct their business in one of the other ways as explained below.

The age of ledgers or manual entries has been replaced by computers. And branches are interconnected so that customers can access their accounts at ease being anywhere. The Branch banking experience is also going over a very rapid change with technology. The long queues at the teller counters have been

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replaced by a very quick and rapid service by the banking personnel. Cheque deposit machines and cash deposit machines are slowly replacing the manual way of depositing with a teller and this in turn is also reducing the chances of manual errors.

3.2 ATM banking

When ATMs were introduced in the 1970s, they were set up only inside or immediately outside their banks' branch offices. They were seen by banks largely as a way of saving money, by reducing the need for tellers. Even with the relatively expensive computer technology of the late '70s and early 80s, the cost of processing deposits and withdrawals via ATMs proved to be less than the cost of training and employing tellers to do the same work.

To encourage customers to embrace the technology and overcome their trepidations about putting their checks into a machine's slot rather than a teller's hands, banks originally didn't charge customers any fees for using ATMs. (Indeed, in time, some banks started charging customers for not using ATMs, through so-called "human teller fees" - a charge for each time a customer uses a teller for a service that could be performed by an ATM.) The main advantage of using an ATM is the fact that you can have access to the cash in your bank account whenever you need it. If, for instance, you are at a store that does not take checks or credit cards but it has an ATM, you can withdraw the money for your purchase. This also means you can travel anywhere without cash. If the location has an ATM and you have your ATM card, you can access your money instantly.

Today's ATMs are not just machines you can use to access cash. On some ATMs you can transfer funds between accounts, buy stocks, check account balances and even buy stamps. All of these features can be accessed with one debit card or credit card and a PIN number. If you take measures to protect your PIN and account information, having access to an ATM is very convenient and makes life's little emergencies far less challenging, but be sure you know the fees associated with ATM use before you use one

3.3 Phone banking

Telephone banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone.

Most telephone banking uses an automated phone answering system with phone keypad response or voice recognition capability. To guarantee security, the customer must first authenticate through a numeric or verbal password or through security questions asked by a live representative (see below). With the obvious exception of cash withdrawals and deposits, it offers virtually all the features of an automated teller machine: account balance information and list of latest transactions, electronic bill payments, funds transfers between a customer's accounts, etc.

Usually, customers can also speak to a live representative located in a call center or a branch, although this feature is not guaranteed to be offered 24/7. In addition to the self-service transactions listed earlier, telephone banking representatives are usually trained to do what was traditionally available only at the branch: loan applications, investment purchases and redemptions, cheque book orders, debit

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card replacements, change of address, etc.

Some of the key features of phone banking and are not restricted to…

Anytime access to account details. Track cheque status. Transaction information for trade services. Request for cheque book, email statements, address updates, DD, FD etc., Details of new products and solutions. Block Debit/credit/charge cards, when in an emergency.

3.4 Mobile banking

Mobile banking (also known as M-Banking, mbanking, SMS Banking etc.) is a term used for performing balance checks, account transactions, payments etc. via a mobile device such as a mobile phone. Mobile banking today is most often performed via SMS or the Mobile Internet but can also use special programs called clients downloaded to the mobile device. The main reason that Mobile Banking scores over Internet Banking is that it enables ‘Anywhere Banking'. Customers now don't need access to a computer terminal to access their banks, they can now do so on the go – when they are waiting for their bus to work, when they are traveling or when they are waiting for their orders to come through in a restaurant. Banks offering mobile access are mostly supporting some or all of the following services and this list could be incomplete too as more services are included with technological advancement.

Account Balance Enquiry Account Statement Enquiries. Cheque Status Enquiry. Cheque Book Requests. Fund Transfer between Accounts. Credit/Debit Alerts. Minimum Balance Alerts. Bill Payment Alerts. Bill Payment. Recent Transaction History Requests. Information Requests like Interest Rates/Exchange Rates.

One way to classify these services depending on the originator of a service session is the ‘Push/Pull' nature. ‘Push' is when the bank sends out information based upon an agreed set of rules, for example your banks sends out an alert when your account balance goes below a threshold level. ‘Pull' is when the customer explicitly requests a service or information from the bank, so a request for your last five transactions statement is a Pull based offering.

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3.5 Internet / E-banking

Internet banking (also referred as E-banking) is the latest in this series of technological wonders in the recent past involving use of Internet for delivery of banking products & services.

E-banking is changing the banking industry and is having the major effect on banking relationships. Banking is now no longer confined to the branches were one has to approach the branch in person, to withdraw cash or deposit a cheque or request a statement of accounts. Through E-banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time. Providing Internet banking is increasingly becoming a "need to have" than a "nice to have" service. The E-Banking, thus, now is more of a norm rather than an exception in many developed countries due to the fact that it is the cheapest way of providing banking services.

The common features of E-banking fall broadly into several categories

Transactional (e.g., performing a financial transaction such as an account to account transfer, paying a bill, wire transfer, apply for a loan, new account, etc.)

Electronic bill presentment and payment - EBPP Funds transfer between a customer's own checking and savings accounts, or to

another customer's account Investment purchase or sale Loan applications and transactions, such as repayments

Non-transactional (e.g., online statements, check links, chat) Bank statements Financial Institution Administration Support of multiple users having varying levels of authority Transaction approval process Wire transfer / Fund Transfer

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A successful Internet banking solution offers the below listed services and are not limited to only those. Features including secured access and consolidated view of all accounts with the bank and others are being added to the list every now and then in line with technological advancements.

Online account statement. Electronic Fund transfer Bill payments Credit cards account statements and related services including and not limited to online

payment of monthly charges, balance transfer. Easy online applications for all accounts, including personal loans and mortgages 24 hour account access Quality customer service with personal attention

The Internet has leveled the playing field and afforded open access to customers in the global marketplace. Internet banking is a cost-effective delivery channel for banks. Consumers are embracing the many benefits of Internet banking. Access to one's accounts at anytime and from any location via the World Wide Web is a convenience unknown a short time ago. Thus, a bank's Internet presence transforms from 'brochure ware' status to 'Internet banking' status once the bank goes through a technology integration effort to enable the customer to access information about his or her specific account relationship. The six primary drivers of Internet banking includes, in order of primacy are:

Improve customer access Facilitate the offering of more services Increase customer loyalty Attract new customers Provide services offered by competitors Reduce customer attrition

3.5.1 Security in E-banking

An authentication factor is a piece of information and process used to authenticate or verify the identity of a person or other entity requesting access under security constraints. Two-factor authentication (T-FA) is a system wherein two different factors are used in conjunction to authenticate. Using two factors as opposed to one factor generally delivers a higher level of authentication assurance.

Two-factor, or multi-factor authentication is exactly what it sounds like. Instead of using only one type of authentication factor, such as only things a user KNOWS (login IDs, passwords, secret images, shared secrets, solicited personal information, etc), two-factor authentication requires the addition of a second factor, the addition of something the user HAS or something the user IS.

Two-factor authentication is not a new concept. Two-factor authentication is used every time a bank customer visits their local ATM machine. One authentication factor is the physical ATM card the customer slides into the machine. The second factor is the PIN they enter. Without both, authentication cannot take place. This scenario illustrates the basic parts of most multi-factor authentication systems; the "something you have" + "something you know" concept.

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"Existing authentication methodologies may also involve three basic “factors” as the security is the top most agenda in an e-banking environment and is again evolving with technology.

Something the user knows (e.g., password, PIN); Something the user has (e.g., ATM card, smart card); and Something the user is (e.g., biometric characteristic, such as a fingerprint).

Authentication methods that depend on more than one factor are more difficult to compromise than single-factor methods."

Some manufacturers also offer a One Time Password (OTP) token. These have an LCD screen which displays a pseudo-random number consisting of 6 or more alphanumeric characters (sometimes numbers, sometimes combinations of letters and numbers, depending upon vendor and model).

This pseudo-random number changes at pre-determined intervals, usually every 60 seconds, but they can also change at other time intervals or after a user event, such as the user pushing a button on the token. Tokens that change after a pre-determined time are called time-based, and tokens that require a user event are referred to as sequence-based (since the interval value is the current sequence number of the user events, i.e. 1, 2, 3, 4, etc.). When this pseudo-random number is combined with a PIN or password, the resulting passcode is considered two factors of authentication (something you know with the PIN/password, and something you have from the OTP token). There are also hybrid-tokens that provide a combination of the capabilities of smartcards, USB tokens, and OTP tokens.

Online security for E-banking, Mobile banking is upgraded every now and then to enable a secure environment for customers to use the online services or anywhere banking services.

4 Technology in BankingThere are numerous place in the above pages that you would have seen a note that the banking experience is evolving over the time with the advent of new technology. Computers and technology have hundreds of uses in the modern world from space missions to microwave ovens. One industry that uses computers and technology to the largest extent and invests in technology all the time is finance and banking!

4.1 Why Use Computers?

For information and efficiency. With reliable information, banks are better able to make the decisions that allow them to do their job – making good investments.

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Computers play a huge part in getting and sharing information, which is why the computer industry is often referred to as the Information Technology, or the I.T. industry.

Computers can make fast calculations and carry out instructions efficiently and more quickly than people - so transactions that would have once taken several minutes or longer, are now done in seconds.

The use of computers in banking first began in the early 1950s, when the first large commercialcomputer was built for Bank of America. Initially, computers were used to process check transactions through Magnetic Ink Character Recognition. With the introduction of the first automated clearinghouse in the early 1970s, electronic funds transfer (EFT) was made possible, and the ATM was introduced. Current statistics show that workers in the finance industry use computers more than any other industry. Banks increasingly have turned toward ATM and other computer technology to reduce the high costs associated with maintaining traditional “brick and mortar” branches staffed by tellers. ATM transactions, along with transactions made by telephone; have replaced transactions formerly made with human tellers. With the introduction of EFT in the early 1970s came the use of ATM’s to process financial transactions. The first ATM was installed at a bank in Valdosta, Georgia, in 1971.Initially, ATM’s served as cash dispensers, but as customer acceptance increased, EFT networks expanded. ATM’s appeared not only at bank locations but in shopping centers, stadiums, airports, and other locations where people gather. By 1995, 9.7 billion transactions were processed at 123,000 ATM terminals. Cash withdrawals remain the most widely used ATM transactions; however, many banks are adding a collection of services to help encourage use of ATM’s, because ATM transactions cost less than teller transactions.

The banks in India started from a disparate IT infrastructure in general and moved over to consolidation and virtualization of databases and servers gradually over the years in order to achieve efficiency, cost reduction, improvement in customer services and to address the issues arising from competition from the other market players. Use of technology in a large but judicious way provides relief in the form of more effective work processes, reduced costs of processing and the capability to handle relatively large transaction volumes with remarkable ease. The Core Banking concept to a great extent emerged from this centralization process and has since received a complete and focused attention from all the banks for its rapid implementation. The banks have also undergone a massive change in terms of improvement in the IT Communication network which has greatly facilitated not only the networking of the internal communication processes but the integration with the external payment systems gateways as well.

In regard to the implementation of ‘Core Banking’ and ‘Electronic Banking’ banks have made considerable progress in recent years as far as the centralization of customers’ accounts is concerned; however, we can also think of making it more useful by expanding the coverage of Core Banking Systems (CBS) and all the essential services / banking products like treasury, Customer Relationship Management (CRM), Corporate Banking, Management Information Systems (MIS), etc. getting seamlessly integrated into the present CBS. The offering of electronic banking service channels like Internet Banking, Mobile Banking, real time fund transfer, ATM Applications and other forms of upcoming electronic banking channels have become important vehicles of offering banking services in

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a cost-efficient manner with wide geographical spread; enhancing the banks’ reputation and brand building addressing the competitive forces as well.

Also seen are the developments in the communication network and messaging system in India as a whole in the form of Indian Financial Network (INFINET), Structured Financial Messaging System (SFMS), VSAT connectivity, cable and leased line connection, fiber optics channels, etc. There have been marked improvements in the Indian payment and settlement systems in the form of popularizing and strengthening of Real Time Gross Settlement (RTGS), Centralized Fund Management System (CFMS), Electronic Clearing System (ECS), National Electronic Fund Transfer (NEFT), Cheque Truncation, National Financial Switch (NFS), developments and initiatives at Clearing Corporation of India Ltd. (CCIL) platform, ATMs, electronic banking channels etc. to name a few.

Some of the popular technologies that have been implemented since the computer revolution in banks are as below....

Core banking Customer relationship management Cheque Truncation System CUG networks Kiosks / new delivery channels Risk management Wireless Technologies Smart cards Data Centers / DM / DW Call Centers/Help Desks Resource management Internet / electronic banking

Lets now see a few of the popular technologies below, which I think has brought about a major change in the way banks operate.

4.2 Cheque Truncation System

Image-based cheque clearing system or Cheque Truncation System (CTS) is a project undertaken by Central banks of many countries such as India (Reserve Bank of India – RBI), UAE (Central bank), Saudi Arabia (Saudi Arabia Monitoring Agency – SAMA) etc. for faster clearing of cheques.

CTS promises to bring multiple benefits to customers by substantially reducing the time taken to clear the cheques as well as to the banks by enabling them to offer better customer services and increasing operational efficiency by cutting down on overheads in physical clearing. In addition, CTS also offers better reconciliation and fraud prevention. CTS uses cheque image, instead of the physical cheque itself, for clearing of the cheque. The cheque image is truncated at the presenting bank. Subsequently, the cheque image moves through various steps in the cheque-clearing cycle and transactions are settled on the basis of images and electronic data.

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4.3 Core Banking

Core banking is a general term used to describe the services provided by a group of networked bank branches. Bank customers may access their funds and other simple transactions from any of the member branch offices. Core Banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers, and have a separate line of business to manage small businesses. Larger businesses are managed via the Corporate Banking division of the institution. Core banking basically is depositing and lending of money.

Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, Internet banking, and branches

The advancement in technology, especially internet and information technology has led to new ways of doing business in banking. These technologies have cut down time, working simultaneously on different issues and increasing efficiency. The platform where communication technology and information technology are merged to suit core needs of banking is known as Core Banking Solutions. Here computer software is developed to perform core operations of banking like recording of transactions, passbook maintenance, and interest calculations on loans and deposits, customer records,

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balance of payments and withdrawal are done. This software is installed at different branches of bank and then interconnected by means of communication lines like telephones, satellite, internet etc. It allows the user (customers) to operate accounts from any branch if it has installed core banking solutions. This new platform has changed the way banks are working.

Some of the Core banking solutions available are Hogan from CSC Systematics from Fidelity Profile from Fidelity Core Bank from Fidelity Bankway from Metavante (Now acquired by Fidelity) CBS from FiServ Bancs from TCS Finacle from Infosys Flexcube from Oracle Financial Services Temenos Core Banking, T24 from Temenos Core Bank from SAP

5 Technological risk factorsAll these technological developments as mentioned earlier have undoubtedly led to greater efficiency and speed which has resulted in enhanced customer satisfaction. At the same time, it has also opened a floodgate of concerns due to the risk factors involved in the implementation. Some of these frauds are perpetrated usually by taking advantage of the lax internal control processes, in spite of the technology safeguards put in place to check such deficiencies. Another set of IT risks which are gaining importance these days are related to software and hardware glitches in the technology implementation. To name a few such risks like,

Phishing Skimming SQL Injection Advance Fee frauds Database and Server Hacking Network attacks Denial of Service attack Web Defacing Cross Site scripting IP Spoofing Man-in the Middle Attacks etc.

have resulted in huge losses for the banks and customers across the globe.

Credit card frauds are also on the rise. Large numbers of customers’ accounts and credit card holders’ accounts have been compromised in the past resulting in not only financial loss, but also legal risk and reputational loss in the market. These electronic windows irrespective of the usage percentage and

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pattern have opened a new gate into the banks’ Information Systems’ components which can be exploited by hackers, inside employees or even ex-employees to name a few. Money Laundering risk through electronic channel and its countering is also a challenging task for the banking and financial system. Though Indian financial system has not been affected to that extent from these risk factors as compared to its counterpart abroad, the strengthening of the electronic banking channel by the banks and systems’ participants will greatly assist in banks’ and financial institutions’ efforts for sustaining and consolidating the business growth and above all maintaining confidence.

6 Retail banking products in DenmarkThe Danish banking market is one of the more open and competitive in the EC. It was opened up for the foreign banks and all foreign exchange controls were removed in 1988.Almost 70 commercial banks and 140 savings banks serve a very small domestic population. The commercial banks dominate the basic lending and deposit sectors, with over 70 percent of the market, but the largest three commercial banks have a combined market share of under 40 per cent.

The local and regional banks tend to cater for the retail banking market, while the larger banks also specialize in merchant banking and corporate finance. There is tough competition with the insurance companies also diversifying into traditional bank areas, such as consumer lending and project finance. The banks, in turn, are expanding into pension and insurance provision.

Some of the major products, product lines and services offered.

Retail banking Corporate banking Institutional services

We will only cover the Retail banking aspects of Denmark in the below pages.

6.1 Retail banking

Retail banking or Personal Finance covers the following products, services as the case may be. Banks may provide these services with different features within the guidelines framed by the central bank.

6.1.1 E-banking

The main features of online banking systems, though not all of them are available in English in the region and in every bank.

Pay bills and make transfers, including cross-border payments Get account balance alerts by e-mail and SMS Get electronic account statements Order foreign currency Monitor your investments and the financial markets Trade securities and use investing tools

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6.1.2 Accounts

These are the main features of most accounts; however, not all are included in every account are

Interest-bearing current account Overdraft facility without an establishment fee Favorable interest rates on deposits and overdraft facilities Debit and/or credit cards with no annual fee Commission-free foreign exchange Free access to online banking and electronic document archives

6.1.3 Loans and credit

The 3 main products in this category are the Credit cards, Personal loans and mortgage loans.

6.1.4 Credit cards

Some cards include various benefits to make traveling more convenient and secure. Some cards provide discounts on car hire, insurance for lost or delayed luggage, and additional cards for family members.

6.1.5 Personal Loans

Some of the loans the banks provide to people to fulfill their wishes are

Consumer loan Car loan Home equity loan Mortgage loan

6.1.6 Mortgage loans

Purchasing a home may be the biggest investment one would ever make. There are many factors to consider before taking out a mortgage loan: the amount, repayment period, interest terms and so on.

Banks have experts who will explain options, help choose the right type of loan, and then customize it to fit the family's circumstances. Depending on where the customer lives, these are some of the loans available:

Fixed rate loan Adjustable rate loan Capped adjustable rate loan Interest-only loan Offset, or open-plan, loan Home equity loan

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6.1.7 Investments

The financial markets are becoming both more complex and more accessible every year. Some people like to research specific investments themselves, while others prefer to rely on the experts.

Whatever the needs may be, banks in this region have experts who will help – with personal advisory services, collective investing options and online trading facilities. Banks here will offer products that can pool the customer's savings with others to reduce expenses, volatility and risk. The mutual funds, or unit trusts products, offer many advantages:

Variety of funds specialized by region and sector Managed by leading investment advisors. Detailed fund data, performance reports and investing news

6.1.8 Online trading accounts

Online trading accounts provides the ability to Trade shares, bonds and mutual funds with ease. Also these accounts help, to follow the progress of investments and the trends in the financial markets like:

Complete transaction data and portfolio breakdown Market news and information Investing tools such as watch lists, benchmarking and charting Savings on commissions

6.1.9 Pensions

The pension plans of these banks provide customers, who want an active retirement, a private scheme that can give more financial freedom after retirement, if planned wisely.

Many options and the expertise to help choose from:

Annuity pensions Capital pensions Unit-linked schemes Investment pools Annuities Group life insurance

6.1.10Insurance

Banks offer expert advice that matches personal and financial circumstances with the right insurance cover. Depending on where the customer lives, banks offer a wide range of covers through partnerships with leading insurance providers:

Home and property Life and critical illness Car

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Accident Travel Road service Repayment protection

6.1.11 Private banking

Today clients with complex financial needs optimize their positions with a variety of tools.

While the services vary from country to country depending on national regulations, these are some of the areas in which banks provide specialized advisory services:

Investment management Portfolio management agreements Insurance Pensions Private companies Trusts and foundations.

7 Credit Rating Agencies and Lending

A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit.

A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates or the refusal of a loan by the creditor.

The factors which may influence a person's credit rating are: Ability to pay a loan Interest Amount of credit used Saving patterns Spending patterns Debt

In different parts of the world different personal credit rating systems exist.

7.1 Credit rating agencies in different geographies

Credit scores for individuals are assigned by credit bureaus. Credit ratings for corporations and sovereign debt are assigned by credit rating agencies.

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In the United States, the main credit bureaus are Experian, Equifax, and TransUnion. A relatively new credit bureau in the US is Innovis. Credit worthiness is usually determined through a statistical analysis of the available credit data.

A common form of this analysis is a 3-digit credit score provided by independent financial service companies such as the FICO credit score.

The term FICO is a registered trademark, comes from Fair Isaac Corporation, which pioneered the credit rating concept in the late 1950s.

In the United Kingdom, the main credit reference agencies for individuals are Experian, Equifax, and Callcredit. There is no universal credit rating as such, rather each individual lender credit scores based on its own wish-list of a perfect customer.

In Canada, the main credit bureaus for individuals are Equifax, TransUnion and Northern Credit Bureaus/ Experian.

In India, the main credit bureaus are CRISIL, ICRA and Credit Registration Office (CRO).The credit rating agency for individuals in India is CIBIL(Credit Information Bureau (India) Limited).

The largest credit rating agencies (which tend to operate worldwide) are Moody's, Standard and Poor's and Fitch Ratings. They operate in the Organizational/ country level ratings and not for individuals.

8 Lending

8.1 Credit

What is Credit? Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. It is any form of deferred payment. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower.

The word credit is used in commercial trade in the term "trade credit" to refer to the approval for delayed payments for purchased goods. Credit is sometimes not granted to a person who has financial instability or difficulty.

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8.2 Consumer Credit

Consumer credit can be defined as money, goods or services provided to an individual in lieu of payment. Common forms of consumer credit include

Credit cards, Store cards, Motor (auto) finance, Personal loans (installment loans), Retail loans (retail installment loans) and Mortgages.

This is a broad definition of consumer credit and corresponds with the Bank of England's definition of "Lending to individuals".

The cost of credit is the additional amount, over and above the amount borrowed, that the borrower has to pay. It includes interest, arrangement fees and any other charges. Some costs are mandatory, required by the lender as an integral part of the credit agreement. Other costs, such as those for credit insurance, may be optional. The borrower chooses whether or not they are included as part of the agreement.

Interest and other charges are presented in a variety of different ways, but under many legislative regimes lenders are required to quote all mandatory charges in the form of an annual percentage rate (APR). The goal of the APR calculation is to promote ‘truth in lending’, to give potential borrowers a clear measure of the true cost of borrowing and to allow a comparison to be made between competing products.

9 Types of LendingLending can be of two types – secured Lending and Unsecured Lending

9.1 Secured Lending

Secured Lending is when the loan is backed by collateral like a house, a car, a two wheeler or a consumer durable. If the lender is not able to pay up, as a measure of last resort, the lender can repossess the hypothecated underlying car, house or consumer durable.

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9.2 Unsecured Lending

Unsecured Lending is a loan which is made without any collateral. These can be fixed amounts like personal loans or a revolving line of credit like credit cards (called revolving because customer can borrow any amount up to a certain limit and pay flexibly)

Unsecured lending is, thus, riskier than secured lending; hence, the reason that personal loans, etc., are priced at higher rate of interests than home loans. Competition also determines the rate of interest charged. For example, in consumer durables lending in India, most goods are financed at zero percent rate of interest but only with stamp fees.

Loans with specific assets pledged as collateral are secured loans. No assets are pledged with unsecured loans. In the absence of any Collateral, a loan is made under the assumption that it is essentially risk free. An unsecured loan is, therefore, only appropriate when the borrower has established record of honoring loan commitments and has shown the financial capacity to honor the loan commitments when it comes due.

The risk free criterion for unsecured loans also disqualifies most loans with long maturity. Unsecured loans are based on the borrower's current financial strength. As the maturity of the loan extends beyond one year the (or operating cycle) the risk increases. For this reason, the unsecured loans are normally used only to finance current assets, which are converted to cash within one year. In contrast the long-term loan repayment depends on continued profitability in upcoming years, and there is always risk that a borrower's financial status might deteriorate before the loan matures.

Also, on a broader term, other types of lending are

Fund based (Cash Credit, Personal / Auto / Housing Loan) Non – fund based (Guarantees, Letters of Credit) Short term (up to 1 year) Medium term (1 to 3 yrs) / Long Term (> 3yrs) Retail Lending

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Corporate Lending Priority Sector Lending

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10 Mortgage LendingA mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.

The cost to the borrower is measured by the annual percentage rate (APR), which is an effective annual rate of interest and fees paid by the borrower.

In many countries, though not all, it is normal for home purchases to be funded by a mortgage. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Ireland, Spain, the United Kingdom, Australia and the United States.

10.1 Mortgage lender

Mortgagee is a party to whom property is mortgaged, usually a lender. Mortgage provides security to the lender. Given the large sum of money involved in financing a property, a mortgage lender will usually want security for the loan that will provide a claim upon that security and will take precedence over other creditors. A mortgage accomplishes this security.

The lender loans the money and registers the mortgage with the title to the property. The borrower gives the lender the mortgage as security for the loan, receives the funds, makes the required payments and maintains possession of the property. The borrower has the right to have the mortgage discharged from the title once the debt is paid. If the mortgagor fails to repay the loan according to the conditions set forth by the lender, then the mortgagee reserves the right to foreclose on the property.

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10.2 Borrower

Borrower is a party who mortgages property. A mortgagor owes the obligation secured by the mortgage. Generally, the debtor / borrower must meet the conditions of the underlying loan or other obligation and the conditions of the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the mortgage by the creditor to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan.

10.3 Needs for lending / borrowing

Borrowing for investment purposes. Aside from the absence of large amount of available money, there are several reasons why an investor (including a buyer of real estate) might borrow funds. Some of these include:

To diversify investments and reduce overall risk by using only part of the available funds for any one investment. However the mortgage loan enables him to purchase more assets than he would otherwise been able to, and therefore in general increases investment risk rather than reducing it.

To invest the borrowed funds at a higher rate of interest (yield) than the borrowing rate; for example, a sum is borrowed at an annual interest rate of 7% per year and used to invest in a project that returns 10% per year. This is likely to be speculative and there is usually a possibility that the project may turn out to return less than 7% per year or to lose money.

To free up equity for other purposes; for example, a commercial enterprise may prefer to use funds to purchase inventory or equipment instead of investing only in land and buildings.

To obtain a tax benefit. In some countries (such as Canada), mortgage interest is not tax deductible, but loans made for investment purposes are.

11 MortgageWhat Is a Mortgage? A mortgage, also called a deed of trust, is a legal document that pledges property as security for the repayment of a loan. If the borrower does not comply with the loan repayment terms, the mortgage gives the lender the right to take ownership of the property and then sell the property in order to satisfy the debt.

The great jurist Sir Edward Coke, has explained why the term mortgage comes from the Old French words Mort meaning "dead" and gage meaning "pledge". It seemed that it had to do with the doubtfulness of whether or not the mortgagor will pay the debt. If the mortgagor does not, then the land pledged to the mortgagee as a security for the debt "is taken from him forever, and so dead to him upon

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condition, and if he doth pay the money, then the pledge is dead as to the mortgagee. This etymology, as understood by 17th-century attorneys, of the Old French term mortgage, which we adopted, may well be correct. The term has been in English much longer than the 17th century, being first recorded in Middle English with the form mortgage and the figurative sense "pledge" in a work written before 1393.

We will now see some the mortgage process flow, some of the important terminologies in the Mortgage world and the EMI calculation.

11.1 Simplified Mortgage Process flow chart

A simplified Mortgage Process is as shown below in the process flow chart

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Person seeking a loan from the lender to purchase a new home or refinance an existing mortgage.

Investors purchase the loan from the mortgage lender; pools the loans and sells to the other investors.

The loan servicer (can be the mortgage lender) administers the loan through its life on behalf of the secondary market investor

Lender originates, processes, fund and closes the loan; sells the loan to the secondarymarket investor.

11.2 Types of Mortgage Lenders

Mortgage lenders are broadly classified as mortgage bankers and mortgage brokers. The primary discerning feature between the two is the origin of the funds utilized to fund the mortgage loans.

11.2.1 Mortgage Banker

The term mortgage banker is a bit misleading since the term does not necessarily refer to mortgages originated by a bank. Although a bank may be a mortgage banker, a mortgage banker is any lender who funds the mortgage transaction with its own funds. These mortgage funds may be from the lender's liquid assets or from the lender's warehouse line. A warehouse line represents funds borrowed by the lender typically as a line of credit.

11.2.2 Mortgage Brokers

Mortgage brokers do not fund the loans they originate. The mortgage broker solicits new business, takes applications and processes the loan file. Although some mortgage brokers have delegated authority to underwrite and prepare closing documents, underwriting and closing functions are typically performed by the wholesale lender.

At the time of closing, the money necessary to fund the loan transaction is provided by the wholesale lender. Mortgage brokerages are typically smaller companies than mortgage bankers and do not have the same degree of public recognition enjoyed by mortgage bankers.

Some important terms that need to be known are as below...The first term you should know is PRINCIPAL. The principal is basically defined as the amount of money you borrow for your home.

Before the principal is provided you will need to make a DOWN PAYMENT. A down payment is the percentage you will put towards the principal. The amount of the down payment will often depend on the cost of the home. Once you pay off the principal, the home is yours.

The next term you will need to know is INTEREST. Interest is a percentage that you are charged to borrow a certain amount of money. This Interest could either be a Fixed Interest or a Variable Interest as the case may be. The principal and interest makes up the majority of your monthly payments or EMI (EQUATED MONTHLY INSTALLMENTS). Amortization is the method by which your loan is reduced over a given period of time. Your payments for the first few years will cover the interest, while payments made later will be applied towards the principal.

A portion of your mortgage payments can be placed in an ESCROW account in order to go towards insurance, taxes, or other expenses. Taxes are the amount of money that you have to pay to your state or government.

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11.3 Mortgage Insurance

Mortgage Insurance is another important term that you will hear in the real estate community, though this is Optional in most economies. However, in some countries, you will not be allowed to close on your mortgage if you don't have insurance for your home. Home insurance covers your home against floods, fire, theft, or other problems.

11.4 Repayment Schedule / Term

is how quickly you'd like to repay your loan — within 15 years, 20 years, 25 years, and 30 years? Typically, the sooner you repay the loan, the more you'll save in interest payments. However, the longer you extend the term of your financing, the lower your monthly payments may be. When choosing a loan term, consider your budget, your long-term spending patterns, your income over the life of the loan and how long you plan to stay in your home.

11.5 Equated Monthly Installments (Calculation)

Lets now take an example of the Indian mortgage market and the calculation behind the EMI (Equated Monthly Installments) also known as regular payments in different other parts.

The formula for calculation of EMI given the loan, term and interest rate is:

EMI = (p*r) (1+r)^n

(1+r)^n - 1

p = principal (amount of loan), r = rate of interest per installment period, i.e., if interest is 12% p.a. r = 12, n = no. of installments in the tenure, ^ denotes whole to the power.

11.6 The Mortgage Loan Process

The lending cycle begins with the prospective home buyer or refinance borrower. Once the perfect home is located the buyer and seller execute a real estate sales contract which defines the sales price and related details of the sale.

The buyer then begins the mortgage process with the chosen lender. The mortgage lender will take the borrower application, process the borrower credit and property details, render a loan decision and then close and fund the loan.

Loan Origination

Mortgage lenders employ loan originators, often referred to as loan officers, who are responsible for the loan origination function. Loan officers typically generate income through commissions earned on the loans they originate. Although technical knowledge is an essential loan officer attribute, accomplished sales skills are equally important.

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Loan Processing

After completion of duties the loan officer will forward the loan file to the loan processor. The loan processor is responsible for:

Review of application and file documents - The loan processor must conduct a thorough review of the loan file to insure loan program conformity and regulatory compliance.

Order out of file documents - The loan processor will assess the file documentation requirements and order necessary documents such as the credit report and appraisal. Some lenders employ junior processors or order out clerks who assist the loan processor with this function.

Follow up and review of incoming file documentation - As new file documents are received, the loan processor will review each item to verify that the file continues to meet the program requirements.

File submission to underwriter - Once the file is complete, the loan processor will assemble the documentation and present the file to the loan underwriter for a loan decision.

Underwriting

The process of evaluating the loan request and determining whether to approve or deny the loan is referred to as underwriting. Mortgage lenders employ underwriters who perform this function. Underwriters are seasoned mortgage professionals who possess exceptional technical and analytical skills. Typical underwriter duties are:

Assess credit risk - The underwriter will review the applicant's credit, income and assets to determine the likelihood of loan default.

Evaluate loan collateral - The property appraisal and related documents will be scrutinized by the underwriter to determine whether the property represents adequate collateral for the loan.

Insure regulatory compliance - The underwriter will review file documents to verify regulatory compliance.

Verify conformity with investor requirements - The underwriter will confirm that the loan meets all guidelines established by the designated secondary market investor.

Render loan decision - The loan request will be approved or denied by the underwriter. In some cases, the underwriter may "suspend" the loan decision while awaiting additional documentation necessary to complete the decision analysis.

Loan Closing

If the loan is approved by the underwriter the file will be forwarded to the loan closer who will prepare the file for closing. The loan closer is responsible for:

Receipt of outstanding approval conditions Coordination of the closing date Verify applicable insurances Prepare loan documents Loan funding

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Post Closing/Shipping

After the loan has closed the loan file will be forwarded to the Post Closing department, also referred to as the shipping department. Post closer duties usually include:

Receipt of executed loan documents Document review File imaging/copying

Quality Control Quality control is an essential part of the mortgage process. Quality control is necessary to ensure regulatory compliance, investor compliance, underwriting prudence and conformity with the lender's internal policies and procedures. Lenders will typically perform a quality control review of 10% of all loan applications including closed loans, denied loan applications and those loan applications withdrawn by the applicant.

11.7 The Process flow Diagram in a Mortgage Lending Process

Loan Origination

Loan Processing

Underwriting

Loan Closing

Post Closing/Shipping

Quality Control

On a go forward, we will more deeply talk about the US Mortgage Industry as they follow a more comprehensive approach to the Mortgage industry. Also, most economies in the world follow the US model.

11.8 Technology in Mortgage Industry

The Technology module is designed to help you with the following:

Outline the importance of technology in the mortgage process.

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List the technological resources used in the mortgage process.

Today, technology is integral to any business. The mortgage industry has been heavily impacted by the growing technology.

Fueled by low interest rates, mortgage volume has escalated to unprecedented levels in recent years. Fluctuating volume levels, frequent rate changes and arduous regulatory compliance responsibilities present constant challenges to the modern day mortgage lender. Technology has become an invaluable component of the loan process and is continually enhanced to meet the demands of the industry. Paperless transactions are quickly becoming the norm.

11.8.1 Electronic Customer Relationship Management (ECRM)

ECRM's provide technological solutions via the World Wide Web and through innovative telephone automation systems. The various ECRM systems currently available assist the lender with generation of new business and management of the lender's existing customer base

11.8.2 Data Mining Systems

Data mining is the process of finding correlations or patterns among specified fields within a large database. Data mining software allows lenders to more effectively analyze customer profiles ultimately influencing future marketing strategies. Data mining also allows lenders to better manage expenses by defining and quantifying revenue and cost factors.

11.8.3 Automated Underwriting Systems (AUS)

Automated underwriting systems employ “artificial intelligence" that utilizes a predictive model that assigns a quantitative risk factor to individual mortgage applications. Overall, AUS have reduced borrower application documentation and often render a favorable recommendation for loans that may not have been previously approved by a human underwriter working independently. Loans underwritten with the aid of AUS are more readily marketable in the secondary market. Today, more loans are underwritten in conjunction with an AUS program than without.

The two most prevalent automated underwriting systems utilized today are:

Desktop Underwriter (DU)-DU is the AUS developed by the Federal National Mortgage Association (FNMA).

Loan Prospector (LP)-LP is the AUS utilized by the Federal Home Loan Mortgage Corporation (FHLMC).

11.9 Life Of A Mortgage Loan

The underlying concept of mortgage banking involves the pledging of land as collateral to secure a loan. Real estate is in the broadest definition land and that which is attached to it. However, for the mortgage industry, the focus is on surface development: the building of houses, shopping centers office buildings, warehouse space, factories and recreational facilities. In addition, our emphasis on the

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residential real estate financing recognizes that it encompasses three-fourths of the total mortgage lending market in the US.

Loan Origination

The loan origination participants include a seller, a buyer and a lending institution. The process begins when that seller places for sale an asset already owned. An asset is defined, as anything owned by a person or organization having monetary value. For the mortgage banking industry an asset would generally refer to a house, some commercial property or an office building. A buyer approaches the seller with an offer to purchase the asset. Generally a real estate broker acts as an intermediary between the buyer and the seller.

Lending Institutions

Once the buyer and seller have agreed on a price, the buyer approaches a lending institution to obtain the funds necessary to purchase the asset. Lending institutions include regulated institutions such as commercial banks, savings institutions, and credit unions and other primary lenders such as mortgage bankers and mortgage brokers.

Underwriting the Loan

The lending institution will undertake steps to qualify the applicant. The application and approval process is often referred to as underwriting the loan. The originating lender is often doing the underwriting on a delegated basis for an underwriting agency. Underwriting is a complicated process that involves both credit and property review. This risk analysis includes:

A review of the creditworthiness of the applicant and his or her ability and willingness to repay the loan in a timely manner in accordance with the loan agreement.

A review of the property used as collateral to ensure that it provides sufficient value to recover the investment should the borrower fail to repay the loan

Researching the Ability to Pay

The borrower’s ability to pay is evaluated by gathering and verifying information on the borrower’s income.

Researching the Willingness to Repay

The borrower’s willingness to repay is generally determined from a credit report. Credit bureaus are firms charged with maintaining records on the repayment history of all borrowers.

Researching the Value of the Property

The property is evaluated by its appraised value. An appraisal is an opinion or estimate of the value of

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the property performed by a person qualified by education, training, and experience to estimate the value of real and personal property.

If the lender is satisfied with the borrower’s ability and willingness to pay the loan and the value of the property is sufficient to minimize any loss on the part of the borrower in the event of default, the lender approves the loan. The borrower will repay the loan with monthly payments that include a portion of the principal (which is the original loan amount), plus interest. The period allotted for repayment is generally 30 years, although loans are also made for periods of 10, 15, or 25 years.

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11.10 The Life of a Loan in Good Standing

Loan servicing may be thought of as a time line. From the transfer of servicing by the loan originator to the final loan payment, loan follows a flow of processing that reflects the sequential steps needed to safeguard the investor’s interest.

In this section, you will learn step by step what occurs with a loan when it is in good standing.

As long as the borrower abides by the terms of the mortgage, the loan service follows a “normal” set of servicing activities. Once the transfer of servicing is complete and the loan is boarded, the normal activities associated with servicing include monthly billing, recording of payments, investor remittance, investor reporting and the payment of taxes, hazard insurance and mortgage insurance. Loans in which the borrower abides by the terms of the agreement are considered to be “in good standing” and will generate revenue for both the investor and the company servicing the loan.

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Loan Origination

Loan ServicingMonthly Payment

Processing

Loan Closing

Loan Deboarding

Underwriting

Pass

Fail

Loan application Rejected

11.11 Exceptions to Loans in Good Standing

In this section, you will learn step by step what occurs with a loan when the loan is an exception to good standing.

When a borrower fails to abide by the loan agreement extra steps must be taken to ensure the safety of both the investor’s and the loan servicer's expected revenue. Examples of exceptions that jeopardize either the investor’s interest or servicing income include borrower delinquency, borrower bankruptcy, delinquent property taxes or unpaid hazard insurance. When these situations occur, corrective action must be taken by the company servicing the loan to either return the loan to good standing or to find additional means of protecting the security of the investment

When a loan is in default, the loan servicer must report delinquencies.

Of all the functions performed in loan administration, none can be any more important than managing delinquent accounts. A residential mortgage is generally classified as delinquent if it is 30 days past due. Technically, a residential loan is delinquent the day after its due date, which is generally the first of the month. However, uniform instruments allow for mortgage payments to be received up to the fifteen days after the due date with no late fee added and no additional interest due. If payment is received more than fifteen days after the due date, the lender may impose a late fee. Late fees vary in accordance with the loan type but can be as much as 5% of the principal and interest payment due.

When a borrower has become delinquent, the loan servicer has two primary obligations. The first is referred to as delinquency reporting to provide details on the status of the loan to those parties that may

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Loan Origination

Loan ServicingMonthly Payment

ProcessingUnderwriting

FailNo Payments 90 days

Pass

Foreclosure Sale

Borrower files Bankruptcy

Proceeds of sale goes to

the investor/lender

Loan Servicing only through court of law

Loan application Rejected

Loan Closing

Loan Deboarding

be affected by the delinquency. The second is to attempt collection of the debt or safeguard the investor’s interest by other means such as foreclosure.

It is the servicer's obligation to report the delinquency condition to the investor, credit bureau and Mortgage insurance company.

11.12 Foreclosure

After all attempts to cure default fail, a servicer must move to foreclose and protect the investment. It is important for lenders to realize that when they foreclose on mortgage, they are only fulfilling their fiduciary responsibility to protect the funds loaned, which are originally the savings of individuals, whether in the form of passbook savings or life insurance. The steps taken to recover a property, and force a sale that will recuperate loaned funds are called demand and ultimately foreclosure.

A mortgage instrument is usually worded in such a manner that the lender has certain options in the event of default. One option provided by the mortgage is to immediately accelerate all future payments. While accelerating the entire debt may not be the best avenue for the lender and is certainly not the best alternative for the borrower, it is the first step that may ultimately lead to foreclosure when loan resolution appears to be unlikely. A demand letter is sent to the borrower, advising the borrower of the delinquency, accelerating the terms of the loan, and informing the borrower of the lender’s intent to foreclose. The demand letter must be sent out 30 days prior to undertaking foreclosure proceedings.

Foreclosure is a legal proceeding in which a property is sold to pay the outstanding debt in case of default. The servicer of a defaulted mortgage loan generally starts foreclosure proceedings if:

Three full installments are owed on a government loan or as few as two full installments are owed on a conventional loan, if the investor is aggressive in its collection requirements

The property has been abandoned The borrower has indicated an unwillingness to honor the mortgage obligation A tenant occupies the property, but the rental income is not being applied to the mortgage

Foreclosure often results in judicial proceedings. The action is much like any other civil suit in that the case must be brought in court, alleging that a mortgage was executed by the borrower and describing the specific property used as security for the loan. The court is charged with protecting the best interests of all parties involved. If the decision of the court is in favor of the lender, the remedy for the lender will depend upon a number of considerations.

11.13 Bankruptcy

Bankruptcy is a court proceeding through which a person, firm, or corporation may be relieved of debt after the surrender of any assets to the court.

A loan in bankruptcy is likely to become a classified asset - one in which the investor may not receive the original profits projected on the loan. If a borrower files for bankruptcy, all attempts at collection must stop. Any contact must be with the borrower’s attorney.

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11.14 Loan Servicing

After a mortgage banker sells a loan to an investor, the investor generally pays the mortgage banker a fee for performing the various loan administration functions. This long-term stream of income (as much as thirty years) makes the servicing function the most profitable aspect of mortgage banking. If the originating lender chooses to sell the servicing rights along with the loan, the price paid by the investor usually includes a servicing premium or additional amount paid over the principal for that right to service the loan.

Loan servicing or residential loan administration can be defined as the total effort required performing the day-to-day management of a residential mortgage. Effective loan administration should result in the following:

Rendering all of the required services to the borrower Protecting the security of the investor Producing a profit for the servicer

The specific responsibilities of servicing the loan typically include:

Monthly collection and allocation of principal and interest Disbursement of funds to the investor Collection and periodic payment of real estate taxes and insurance premiums Handling of assumptions, partial release and modification of lien agreements Annual review of loans involving among other things, ARM adjustments, current insurance

policy, and taxes paid. And escrow analysis. Any other activities necessary to protect the investors security interest, including if necessary,

collections activity, and foreclosure proceedings

12 A brief understanding of Mortgage Industry in different economies

12.1 India

The types of mortgage that are accepted in the Indian mortgage industry for the facilitation of mortgage loan are varied. Until recently, the Indian mortgage market was under the unorganized sector. The Government of India liberal economic policy in the late 1990s the facilitated the entry of foreign institutional investors (FIIs) and foreign direct investment (FII) in the Indian market. The Indian markets which were previously closed to such investments registered tremendous economical growth across all industry sectors.

In the last 15 years, the growth of the manufacturing industry in India propelled the growth of infrastructure industry in India. Furthermore, with the growth of infrastructure industry in India, the Indian mortgage loan industry witnessed tremendous growth. Today, the organized mortgage loan sector of India is registering astronomical growth and it is estimated to be US$ 18 billion industry. The Indian mortgage loan industry is consistently registering 20-50 % growth on a year-on-year basis, from the year 2000 onwards.

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12.1.1Important Concepts regarding mortgages in India

Understanding the important concepts regarding mortgage is one of the major factors for customers who opt to take out loans against mortgage.

Mortgage against loans is gaining popularity in India with the development of the economic conditions and the increased activity on construction and related ventures. The Indian mortgage market is experiencing a quick growth but the contribution factor of the mortgage industry i.e., the mortgage to gross domestic product (GDP) ratio is very low in India in comparison with the other developed countries.

12.1.2The important concepts regarding mortgage:

Competitive interest rate: The option of getting the interest rate lowered at the cost of number of options in the mortgage scheme

Payment options: There are special features such as payment of principal, skip and double up offered by some financial corporation’s once a year pertaining to the date of the mortgage

Rate guarantee: This scheme actually allows a fixed rate of interest for the customers

12.1.3Refinancing

Refinancing is a very important concept pertaining to the mortgage against loan schemes. This scheme emphasizes on the option of taking out another loan against mortgage is case there is insufficient funds to pay off the first one. The refinancing concepts also have an advantage which is the interest rates are lowered in case a customer takes out a refinance on mortgage. There are other advantages of refinancing concept of mortgages, such as:

The total sum of monthly payments by the customer gets reduced The total sum of interest paid by the customer during the term period of the loan is reduced The loan term period is reduced so as to enable the customer to repay the loan quickly

12.2 Denmark

The Danish mortgage system has proved very effective in providing borrowers with flexible and transparent loans on conditions close to the funding conditions of capital market players. Simultaneously, mortgage bonds transfer market risk from the issuing mortgage institution to bond investors. Lastly, strict property appraisal rules, credit risk management by the mortgage institution, and tight regulations including the so-called 'balance principle', have also historically shielded mortgage bonds from default risk.

In Denmark, the mentioned Mortgage Credit Institutions (MCIs) are the only financial institutions allowed to grant loans against mortgage on real property by issuing mortgage bonds. The scope of activities allowed to MCIs is limited to the origination and servicing of mortgage loans, their funding, exclusively through the issuance of mortgage bonds, and activities deemed accessory. As of 2007, there are eight mortgage credit institutions active in the Danish mortgage market, some affiliated with commercial banks.

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12.2.1The Balance Principle

The Danish Mortgage Credit Act imposes strict matching rules between the assets (e.g., mortgage loans) and the liabilities (e.g., mortgage bonds) of mortgage credit institutions. Each new loan is in principle funded by the issuance of new mortgage bonds of equal size and identical cash flow and maturity characteristics, dubbed the balance principle or, the balanced book principle. The proceeds from the sale of the bonds are passed to the borrower and similarly, interest and principal payments are passed directly to investors holding mortgage bonds. Moreover, the Mortgage Credit Act establishes strict lending rules which differ depending on the type of property financed. Maximum loan to value (LTV) ratios and lending periods are set up for each category of property. While for all categories of properties, the maximum lending period can be up to 30 years, maximum lending limits differ significantly according to the nature of the mortgaged property. For owner-occupied homes, rental properties, cooperative homes and housing projects, mortgage loans can represent up to 80 percent of the value of the property. In contrast, maximum LTV ratios are limited to 70 percent for agricultural properties, 60 percent for commercial real estate and secondary residences, and 40 percent for un-built sites.

The first Danish Mortgage Act was passed in 1850, establishing new mortgage credit institutions which were cast as (non-profit) associations. Loans against mortgages on real property are financed by issuing bonds in series. Initially, borrowers were jointly liable for the liabilities of the corresponding pool of mortgages. The system kept evolving thereafter, in particular in the early 1970s, when mortgage financing was simplified and standardized. The last major round of reform took place in 1989, among others authorizing commercial banks to own mortgage credit institutions. After 2001, the majority of mortgage bonds were issued without the joint liability of borrowers.

12.2.2Property registration and the granting of a loan

A mortgage system depends on the effective registration of property units and rights in land. The cadastre (A cadastre commonly includes details of the ownership), maintained by the National Survey and Cadastre, identifies each land parcel and property unit. The identification is used by other national information systems. The Land Registration Court handles registration of titles to land, mortgages and other charges. The MCIs grant a loan only on condition that the mortgage deed is registered, but without any other type of security. Also, a very detailed credit check isn't done on the borrower; the collateral of the loan is the property, rather than the borrower. The municipalities maintain information systems, recording among others zoning, building construction details, and taxable value, and the tax authorities maintain a mass appraisal system. Both latter systems are updated through compulsory abstracting of title deeds, collected through the municipalities.

12.2.3Foreclosure

In the event of non-payment of its mortgage-related obligations by the mortgagor, the mortgage bank may put the property up for a forced sale. Forced sales are carried through by enforcement courts (Fogedretten), which are part of the ordinary system of courts. Mortgagees will be covered in order of priority and while uncovered mortgage loans will be deleted from the Land Register, the mortgagees will keep their (uncovered) claim against the borrower as a personal claim. It typically takes no more than six months from the time when the borrower defaults on the loan until a forced sale can be carried

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through. This is in contrast with France, say, where it can take several years to foreclose.

The human costs of turning a family into the street are mitigated through social housing. Denmark has a total housing stock of 2.5 million housing units, of which 19 per cent belong to social housing associations. The associations are subsidized by the government and municipalities in terms of reduced interest and mortgage repayments and loan guarantees. Also the residents - as in other rented housing - receive individual rent subsidies related to income, size of household and size of apartment. People in acute need of housing can turn to the municipality for help if they are without possibilities to solve their own housing problem.

98% of Danish mortgages are securitized to mortgage-backed securities and sold by the mortgage originators.

12.2.4Comparison with the US system

The Danish approach is being discussed as an alternative to the traditional US system. Here are differences:

Danish borrowers can pay off fixed rate loans at a discount when interest rates increase, reducing “negative equity” and thus reducing defaults. “When everyone else is in a bad mood, they’re in the money.”

Originators are compensated for and retain first loss responsibility covering credit risk on the loans that they make; loan performance is published so bondholders can reassure themselves that credit risk is being adequately covered, improving confidence.

Concern about who is servicing the loans and mandatory loan write downs are limited to originators and have not reached bondholders.

Loans and bonds are easy to understand because every originator’s product is like the other originators’ product and described in a national mortgage law.

Documentation and appraised values are consistent because a separately regulated mortgage institute has checked them when the loans are funded by mortgage bonds.

There is no inside information favoring certain investors as bond information is kept in one data base with reports being issued through the exchange.

Bond investor confidence and knowledge results in lower bond yields and interest rates. This has caused some adverse reaction from Wall Street which makes more fees from non-standard bonds.

12.2.5Business

MCIs which obtain application data and review documentation and appraisals of originators who propose mortgages.

Each MCI, every day, issues new bonds valued at one cent each into an existing bond pool in an amount equivalent to the new loans it makes that day. The money manager of the mortgage institute decides when to sell the new bonds into the secondary market since they are identical to other bonds in the same series.

In event of a rise or drop in interest rates, a new bond pool may be started at a rate ½ percent different than its predecessor, but the yields are equivalent.

The bond prices trade and are quoted at day end and there is inter day pricing. The amount of

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cash transferred by the mortgage institute to the originator (borrower) is based on the number of bonds issued and their previous day’s quote.

Every time a loan balance is reduced, an equivalent number of bonds are identified by lottery and converted into a different bond also with a one cent par value (that will convert at par into cash at the next payment date). This and the fact that originally bonds issued equal the full amount of the loan, enforce the Balance Principal.

Loan prepayments can be made by using cash with some advance notice requirements so the bond market can anticipate what is coming. In effect a contract is made in advance that the cash presented will be used for prepayment at the next payment date.

Loans can also be prepaid using bonds. These bonds can be purchased at a discount if that’s where they are trading, and receive prepayment credit at par. Loan prepayments in bonds require presentation of bonds from the series that funded the loan. Bond investors do not see loan prepayments with bonds to be a prepayment at all since the bonds eliminated due to the prepayment do not include any bonds being held by the investor.

13 Important Terms and their meanings

Amortization, Terms and Rates The amortization is the allocation of a lump sum amount (borrowed funds) to different time periods (payments) including related interest or other finance charges and the adjusted principle balance remaining with each scheduled payment. Simply put, it is the schedule of repayment of borrowed funds over a period of time. An amortization schedule will include the schedule of payments with a breakdown of how much of each payment will be allocated toward interest and how much will be allocated toward the principle balance. It will also include due dates and the declining principle balance with each payment. The term refers to the number of years the loan will last. It is often referenced in months on loan documentation such as 360 months for a 30-year term. Rates are the amount charged by the lender to the borrower to borrow the funds. Repayment will include the rate or interest rate over and above the amount borrowed.

Negatively Amortizing Mortgages Negative amortization occurs when the borrower's payment is insufficient to pay the accrued monthly interest on the mortgage. Unlike fully amortizing mortgages, there is no monthly reduction of the principal balance. Instead, the unpaid monthly interest is added to the loan balance resulting in an escalating rather than de-escalating loan balance. The monthly payments are established based upon established payment computation factors and are often significantly less than fully amortizing payment amounts. The monthly payment will increase yearly until the end of the negative amortization period at which time the fully amortizing payment amount begins. Negatively amortizing loans may provide either a fixed interest rate for the term of the loan or varying types of adjustable interest rate provisions. Graduated payment mortgages which require lower payments during the initial years are a type of negatively amortizing mortgage

LTVThe loan-to-value (LTV) ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. For instance, if a borrower wants $130,000 to purchase a house worth

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$150,000, the LTV ratio is $130,000/$150,000 or 87%.

CLTVCombined Loan To Value (ratio) (CLTV) is the proportion of loans (secured by a property) in relation to its value.

The term "Combined Loan To Value" adds additional specificity to the basic Loan to Value which simply indicates the ratio between one primary loan and the property value. When "Combined" is added, it indicates that additional loans on the property have been considered in the calculation of the percentage ratio.

The aggregate principal balance(s) of all mortgages on a property divided by its appraised value or Purchase Price, whichever is less. Distinguishing CLTV from LTV serves to identify loan scenarios that involve more than one mortgage. For example, a property valued at $100,000 with a single mortgage of $50,000 has an LTV of 50%. A similar property with a value of $100,000 with a first mortgage of $50,000 and a second mortgage of $25,000 has an aggregate mortgage balance of $75,000. The CLTV is 75%.

Combined Loan to Value is an amount in addition to the Loan to Value, which simply represents the first position mortgage or loan as a percentage of the property's value.

PITIIn relation to a mortgage, PITI (pronounced like the word "pity") is an acronym for a mortgage payment that is the sum of monthly principal, interest, taxes, and insurance. That is, PITI is the sum of the monthly loan service (principal and interest) plus the monthly property tax payment, homeowners insurance premium, and, when applicable, mortgage insurance premium and homeowners association fee. For mortgagers whose property tax payments and homeowners insurance premiums are escrowed as part of their monthly housing payment, PITI therefore is the monthly "bottom line" of what they call their "mortgage payment" (although actually, in more precise terms, it is a combined mortgage,-tax,-and-insurance payment).

ARM

A loan with an interest rate that changes periodically in keeping with a current index, like one-year treasury bills. Typically, however, ARMs cannot jump more than two percentage points per year or six points above the starting rate.

AppraisalLenders usually require that the property be appraised by a qualified appraiser. The amount of the appraisal is the maximum value on which the loan will be based. For eg: if the appraisal of a said property is $100,000, the lender will loan 80 percent of value, the maximum mortgage would be $80,000.

Balloon PaymentOne payment, usually the last on a mortgage is larger than the others. In the case of second mortgages held by the sellers often only interest is paid until the due date - then the entire amount borrowed (the principal) is due.

Conventional Mortgage in US

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A mortgage loan not insured by HUD or guaranteed by the Veterans' Administration. It is subject to conditions established by the lending institution and State statutes. The mortgage rates may vary with different institutions and between states. (States have various interest limits.)

DeedA formal written instrument by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the State where the property is located, and should be delivered to the purchaser at closing day. There are two parties to a deed: the grantor and the grantee. (See also deed of trust, general warranty deed, quitclaim deed and special warranty deed.)

Deed of TrustLike a mortgage, a security instrument whereby real property is given as security for a debt. However, in a deed of trust there are three parties to the instrument: the borrower, the trustee and the lender (or beneficiary). In such a transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the debt to the lender or beneficiary. If the borrower pays the debt as agreed, the deed of trust becomes void. If, however, he defaults in the payment of the debt, the trustee may sell the property at a public sale, under the terms of the deed of trust. In most jurisdictions where the deed of trust is in force, the borrower is subject to having his property sold without benefit of legal proceedings. A few States have begun in recent years to treat the deed of trust like a mortgage.

EncumbranceA legal right or interest in land that affects a good or clear title and diminishes the land's value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes or restrictive covenants. An encumbrance does not legally prevent transfer of the property to another. A title search is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether he wants to purchase with the encumbrance or what can be done to remove it.

EscrowFunds paid by one party to another (the escrow agent) to hold until the occurrence of a specified event, after which the funds are released to a designated individual. In FHA mortgage a transaction, an escrow account usually refers to the funds a mortgagor pays the lender at the time of the periodic mortgage payments. The money is held in a trust fund, provided by the lender for the buyer. Such funds should be adequate to cover yearly anticipated expenditures for mortgage insurance premiums, taxes, hazard insurance premiums and special assessmentsHazard Insurance Protects against damages caused to property by fire, windstorms and other common hazards.

HUDU.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes.

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LienA claim by one person on the property of another as security for money owed. Such claims may include obligations not met or satisfied, judgments, unpaid taxes, materials or labor. (See also special lien.)

Mortgage NoteA written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment

TitleAs generally used the rights of ownership and possession of particular property. In real estate usage, title may refer to the instruments or documents by which a right of ownership is established (title documents), or it may refer to the ownership interest one has in the real estate.

Title InsuranceProtects lenders or homeowners against loss of their interest in property due to legal defects in title. Title insurance may be issued to a "mortgagee's title policy." Insurance benefits will be paid only to the "named insured" in the title policy, so it is important that an owner purchase an "owner's title policy," if he desires the protection of title insurance.

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