PROJECT ON

“BANKS AS CONSTITUENT OF PAYMENT SYSTEMS”

PREPARED BY

AMEY KASHINATH KOLHE

ROLL NO:-15

T.Y.B.COM. (BANKING AND INSURANCE)

SEMISTER-V, YEAR-2010-11

UNDER THE GUIDANCE OF

PROF. BHAVIKA KARKERA

SUBMITTED TO

SHAILENDRA EDUCATION SOCIETY’S

ARTS, SCIENCE, COMMERCE COLLEGE

DAHISAR (E), MUMBAI-400068

(NAAC ACCREDITATED B+)

(AFFILIATED TO UNIVERSITY OF MUMBAI)

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ACKNOWLEDGEMENT

I express thanks to everybody who helped ME by their direct or

indirect contribution have helped us in converting my thought into reality

It is really impossible to acknowledge all the people who helped us in

preparing this project. We take this opportunity to express my gratitude

towards my PROFESSOR BHAVIKA KARKERA for her encouragement

and guidance to prepare project of “BANKS AS CONSTITUENT OF

PAYMENT SYSTEM” FOR THE THIRD YEAR OF “B.COM

(BANKING AND INSURANCE)” specialization course in

“SHAILENDRA EDUCATION SOCIETY OF ARTS, COMMERCE AND

SCIENCE” (2010-2011)

And, last but not least we would like to express our humble thanks to

‘parents’ and friends especially Yash n Dinesh for their encouragement and

boosting which they have given to us….

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INDEX

SR. NO. TOPICS PAGE

NO.

1 INTRODUCTION 4-12

2 BANKING, A BUSINESS OF TRUST 13-16

3 CREDIT CREATION 17-39

4 PAYMENT SYSTEMS 40-79

5 FOREX 80-86

6 BANKING CHANNELS 87-88

7 N.E.F.T. & R.T.G.S SERVICES 89-92

8 THE PRINCIPLES 93

9 QUESTIONAIRE

10 CONCLUSION

11 BIBLIOGRAPHY

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CHAPTER 1

INTRODUCTION

1.1 BACKGROUND1.2 BANEFITS1.3 GENERAL OVERVIEW

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CHAPTER 1

INTRODUCTION

1.1 BACKGROUND

Reserve Bank of India, after setting up of the Board for Payment and

Settlement Systems in 2005, released a vision document incorporating a

proposal to set up an umbrella institution for all the RETAIL PAYMENT

SYSTEMS in the country. The core objective was to consolidate and

integrate the multiple systems with varying service levels into nation-wide

uniform and standard business process for all retail payment systems. The

other objective was to facilitate an affordable payment mechanism to benefit

the common man across the country and help financial inclusion.

IBA's untiring efforts during the last three years helped turning this

vision a reality. National Payments Corporation of India (NPCI) was

incorporated in December 2008 and the Certificate of Commencement of

Business was issued in April 2009. It has been incorporated as a Section 25

company under Companies Act and is aimed to operate for the benefit of all

the member banks and their customers. The authorized capital has been

pegged at Rs 300 crore and paid up capital is Rs 30 crore so that the

company can create infrastructure of large dimension and operate on high

volume resulting payment services at fraction of the present cost structure.

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1.2 BENEFITS

Payment systems improve financial transparency, by bringing cash into the banking system, which would otherwise have been kept out of the system. Banks can then effectively deploy additional cash flow, thus stimulating business growth and consumption.

In fact, according to a study by the McKinsey, India ranks No.4 in the world, in terms of currency in circulation. India’s currency in circulation is 11.8% of GDP against the OECD average of 6.3%. This could be attributed to the fact that more than half of India’s economic output is produced by small-scale agriculture and some 44 million household businesses. Mckinsey estimates that improving the payment systems in India, by fully moving to electronic systems, could result in an annual savings of close to $6.3 billion.

We need to ensure that payment systems are benchmarked with the best in the world, in terms of the structure, processes and operations.

While substantial strides have been made in the Systemically Important Payment Systems (SIPS) by the establishment of the Clearing Corporation of India and the RTGS system, the Retail Payment Systems (RPS) are still dominated by paper-based cheque clearing processes.

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1.3 GENERAL OVERVIEW

Payment systems in India are comprised of electronic payment systems as

well as paper-based systems and can be segregated into Large Value

Payment Systems and Retail Payment Systems. The large value payment

infrastructure is comprised of the of Real Time Gross Settlement (RTGS)

system, the High Value Clearing system, and the Clearing Corporation of

India Ltd. (CCIL). The retail payment systems include the Magnetic Ink

Character recognition (MICR)/non-MICR Check Clearing, National

Electronic Funds Transfer system (NEFT), Electronic Clearing Service

(ECS), and payment channels like card, internet and mobile phone-based

products. Based on the criteria outlined by the Committee on Payment and

Settlement Systems (CPSS), the the RTGS system and the High Value

Clearing system have been identified by the Reserve Bank of India (RBI),

the country’s central bank, as the Systemically Important Payment Systems

(SIPS) in India.

In 2001, the International Monetary Fund (IMF) as part of its Financial

Sector Assessment Program (FSAP) assessed India's payment systems. The

findings of the FSAP were never published, however, a recent (2009) report

by the Committee on Financial Sector Assessment (CFSA) mentions the

FSAP and its conclusions. The 2009 CFSA report states that the FSAP

concluded that "India’s compliance with the core principles was only

partial, particularly with regard to the lack of legal and contracted

framework relevant to the payment and settlement systems, multilateral

netting arrangements used in clearing were not backed by legislation and

real-time finality was not assisted by bankruptcy legislation" (p. 264).

Notably, the statutes did not provide a legal backing for multilateral netting

and there was no legal basis for settlement finality. Also, the system did not

have a law for the regulation and supervision of payment systems. The

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FSAP also raised concerns for the security of the SIPS in India and for the

amount of risk allowed to system participants. The FSAP opined that “the

introduction of Real Time Gross Settlement (RTGS), which would handle

all large value payments, would greatly enhance compliance, boost

efficiency and lower the risks in the payment system” (p. 264).

The RTGS system was subsequently introduced. Per the 2009 CFSA report,

in order to address the shortcomings, the Payment and Settlement Systems

Act was passed in 2007 which strengthened the legal framework for

payment and settlement systems in the country. The reforms undertaken

since the 2001 FSAP also greatly contributed to the compliance of the

Indian payment systems with international standards, the CFSA report

notes.

The Government of India, in consultation with the RBI, constituted the

CFSA in September 2006, with the objective of undertaking a self-

assessment of financial sector stability and development. In this larger

context, the CFSA constituted an Advisory Panel on Institutions and Market

Structure (the Panel) with the mandate to assess, inter alia, the level of

compliance of the SIPS in India with the Core Principles for Systemically

Important Payment Systems (CPSIPS) developed by the CPSS. The

assessment conducted by the Oanel and published by the CFSA in March

2009 concludes that the RTGS System observes six of the ten Core

Principles (CPs), and broadly observes two. Core Principle V is not

applicable to the RTGS system. The other SIPS in the country assessed

against the CPSS' CPSIPS was the High Value Clearing (HVC) system. The

CFSA report notes that the HVC system observes eight CPSIPS, broadly

observes one, and partly observes one. In the case of the RTGS system,

weaknesses were identified in the areas of risk management, security and

operational reliability, and price efficiency. In the case of the High Value

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Clearing system, weaknesses were noted in the areas of risk management

and timely completion of settlement. As regards to the central bank

responsibilities in overseeing payment systems, the RBI (India's central

bank) observes three and broadly observes one.

Based on the results of the World Bank’s 2008 Global Payment Systems

Survey involving 142 countries, Cirasino and Garcia’s report “Measuring

Payment System Development” published in the same year, evaluates

India’s compliance with four distinct sub components which are broadly

based on the CPSS' CPSIPS. The four components of the Cirasino and

Garcia assessment are the (1) legal and regulatory framework; (2) large-

value payment systems; (3) retail payment systems; and (4) the enabling

environment for the payment system oversight function. The first

component, the legal and regulatory framework, covers CP I and to some

extent CP II. The second component large-value payment systems "is based

on two subcomponents: i) system design and key policy decisions that affect

the safety, soundness and efficiency of the system; and, ii) the actual usage

of the large-value system in terms of the share of the settlement throughput

that flows through the system being rated versus other systems that process

large-value payments" (p. 5). This component addresses some aspects of CP

III through CP X. The third component on retail payment systems is not

discussed in this report because the retail payment systems in India are not

systemically important and therefore fall outside the purview of this

evaluation. The fourth component basically focuses on the Central Bank's

payment system oversight function. The 2008 report by Cirasino and Garcia

concludes that India achieves "medium-low level of development” for

component one; and “medium-high level of development” for components

two and four. However, the information contained in this report, although

informative, does not directly address India’s compliance with the CPSIPS.

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Also, the World Bank Survey and the Cirasino and Garcia assessment

analyze the legal framework that existed before the Payment and Settlement

Systems Act of 2007 came into effect. As indicated in the World Bank

Survey report of 2008, the then pending Act would substantially improve

the country’s legal and regulatory framework with respect to the payment

and settlement systems.

The 2008 World Bank report notes that the RBI’s payment system oversight

is performed over all systemically important funds transfer systems, and that

it is spelled out in a regulation or policy document. The World Bank

remarks that the oversight function of the RBI will be further formalized

when the Payment and Settlement Systems Bill is enacted into law. As

mentioned earlier, the Payment and Settlement Systems Act was enacted in

2007. Overall, even pending the enactment, the World Bank survey found

the oversight function well-established and performed regularly on an on-

going basis. There is also a specific unit within the RBI responsible for

payment system oversight. Although in a non-formal and ad-hoc manner,

the RBI does cooperate with other relevant authorities through regular

meetings and exchange of views and opinions. Further, a formal National

Payments Council is in place in India. The RBI holds regular informal

meetings with senior levels of stakeholders to discuss strategic issues for the

payment system. The RBI also consults stakeholders on particular

operational issues on a bilateral basis or through creating an ad-hoc task

force or working group. In addition, the RBI consults with the Indian Banks'

Association (IBA) on important issues pertaining to the payment systems

regularly.

The 2008 World Bank report notes in its appendix that legal provisions in

India: (1) recognize bilateral and multilateral netting arrangements; (2)

recognize the set off of mutual claims bilaterally; (3) recognize electronic

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processing of payments; and (4) provide for the enforceability of security

interests provided under collateral arrangements. The 2008 World Bank

publication noted that India was reforming its legal and regulatory

framework for payment systems. These reforms were aimed at reducing

systemic risk; improving the overall efficiency of the payment system;

meeting the demands of the market, the end users, and the government

institutions to provide better payment and settlement services; and keeping

up with technological innovation.

The RTGS System became operational in March 2004. It is owned and

operated by the RBI. Its operations are governed by the RTGS Membership

Regulations of 2004 and RTGS (Membership) Business Operating

Guidelines of 2004. The RTGS System has led to the reduction of

settlement risk in large value payments in the country. The High Value

Clearing system is a paper-based clearing system for large value payments.

This clearing is held at 27 major cities. At 17 centers where the RBI

manages the clearing house, the settlement takes place in the current

accounts maintained by the participating banks with the RBI, while at the

other centers, the settlement banks are commercial banks. In recent years,

there has been a significant increase in both the volume and value of

transactions through the SIPS, with the RTGS system constituting the

largest segment in terms of value of transactions. CCIL was set up (with

some major banks as its core promoters) to upgrade the country’s financial

infrastructure in respect of clearing and settlement of debt instruments and

forex transactions. It currently provides guaranteed settlement facility for

government securities clearing, clearing of Collateralized Borrowing and

Lending Obligations (CBLO) and foreign exchange clearing.

In order to focus attention on the payment and settlement systems, the Board

for Regulation and Supervision of Payment and Settlement Systems (BPSS)

11

was set up on March 10, 2005 as a Committee of the RBI's Central Board. It

is entrusted with the role of prescribing policies relating to the regulation

and supervision of all kinds of payment and settlement systems, setting

standards for existing and future systems, authorizing the payment and

settlement systems and determining the criteria for membership to these

systems, including the continuation, termination and rejection of

membership. The setting up of the BPSS has strengthened the institutional

framework for payment and settlement systems in the country, the 2009

CFSA report notes. Further, the setting up of National Securities Depository

Limited (NSDL) and Central Depository Services (India) Limited (CDSL)

for the capital market settlements and Clearing Corporation of India Ltd.

(CCIL) for government securities, forex and money market settlements has

improved efficiency in market transactions and settlement processes.

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CHAPTER 2

BANKING A BUSINESS OF TRUST

2.1 PRINCIPLES OF BANKING

2.1.1 LIQUIDITY

2.1.2 SAFETY

2.1.3 PROFITABILITY

2.1.4 SECRECY

2.1.6 SERVICE QUALITY

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CHAPTER 2

BANKING, A BUSINESS OF TRUST

Banks are able to lend a major portion of their deposits, and play the

role of an intermediary and constitute the payment system because of

understanding that banks will honour there commitments to the people. If

this trust is broken for any reason, the banks will not able to survive. This

trust might suffer a setback if the banks are not able to return all the deposits

at all times. Failure of one bank can lead to failure of other banks too

because their role as a constituent of the payment system make them have

substantial dealings with others. Large scale systematic failure can cause a

collapse of the economy itself.

To retain the trust of the people, banks have to adhere to certain

principles while conducting a business.

2.1These principles are as follows:

2.1.1 Liquidity : Banks have to necessarily lend most of their deposits

to be in business as their main source of income is the spread they

earn on loans. At the same time, they should be in a position to meet

the monetary demands of their customers. Even a single default by a

bank can have serious consequences. Therefore, banks have to

maintain sufficient cash reserves at all times. The more the banks

lend, the more the profit they make, but they have to balance the

opposing needs of profits & liquidity. Benefits cannot afford to

compromise liquidity for profits.

2.1.2 Safety : The trust of people is influenced by their perception of

how prudent a bank is in their business practices. A bank that is

imprudent to lend to risky business, cannot enjoy the trust of its

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customers. Just as liquidity & profitability are related, risk &

profitability too are inversely related. Banks have to find the fine

balance between the two of them to survive in business. After all,

banking is essentially management of risks. The more prudent a bank

is in managing risks, the better will be its image and prospectus of

survival and growth.

2.1.3 Profitability : Customers are likely to avoid a bank if it does not

have sufficient liquidity or it is unsafe. However, their trust is likely

to dwindle more if they consider to be profitable. If a bank incurs

losses or makes only meager profits year after year, the customers are

bound to get perturbed unless of course they have other comforts. In

India, people entertain the feeling that the public sector banks will not

fail because the government as their owners will come to their rescue.

The attitude of the same people to bank in the private sector is very

different. Apart from keeping the trust of the people, banks have to be

profitable to survive in the long run.

2.1.4 Secrecy : During the course of the business, banks come to know

many details of the finance of the customers. Banks have to maintain

confidentiality of such information as revealing the information to the

wrong persons can adversely affect the customers. For examples, a

competitor of the customers or a journalist may use confidential

financial information to cause loss or damage to the reputation of the

customer. Banks owe a duty to their customers to ensure absolute

secrecy of customer information. A bank that does not take his duty

seriously is not likely to be trusted by its customers.

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2.1.5 Service quality : Banking is the transaction intensive business, as

customers have to deal with the banks for almost all the financial

transaction. Since the intensity of interactions is high, customers

would naturally prefer to deal with the banks that make the

interactions pleasant and fast. Poor quality of service in the terms of

errors and delays can seriously erode the confidence of the customers

in the banks because errors and delays in the financial dealings can

result into financial loss apart from causing bitterness. Banks that do

not take their obligations to provide quality service cannot hope to

enjoy the trust and patronage of its customers.

Regulations are good for the economy and the bank. Compliance with

regulatory and statutory requirements is sacrosanct.

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CHAPTER 3

CREDIT CREATION

3.1 DEPOSIT SERVICES

3.1.1 CURRENT ACCOUNT

3.1.2 SAVING ACCOUNT

3.1.3 FIXED DEPOSIT ACCOUNT

3.1.4 RECURRING DEPOSIT ACCOUNT

3.2 LOAN & CREDIT SERVICES

3.2.1 RETAIL LOANS

3.2.2 WORKING CAPITAL

3.2.3 PERSONAL OVERDRAFT

3.2.4 BUSINESS / CORPORATE CARD

3.2.5 POST SALE FINANCE OR TRADE FINANCE

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CHAPTER 3

Credit Creation

Deposit Services

Banks accept demand deposits and fixed or time deposits. Demand deposits

are repayable on demand while fixed deposits have a fixed maturity period

and are repayable only after the agreed period. Since demand deposits are

more liquid as compared to fixed deposits, the interest paid on such deposits

is at a low rate or no interest is paid at all. Lower the liquidity, higher is the

rate of interest. Therefore, longer the period of the fixed deposit, higher will

be the interest that is paid.

The various products offered by banks within the deposit services are:

Current accounts

Savings bank accounts

Fixed deposit accounts

Recurring deposit accounts

Loan or Credit Services

The products offered by banks within loan services are as follows:

Retail loans

Personal overdrafts

Credit cards

Business/Corporate credit

Working capital facilities

Business card

Post-sale finance or trade finance

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3.1.1 Current Accounts

Savings accounts mainly aim at meeting the personal needs of

individuals. Similarly, current accounts [CAs] are meant to meet the

business needs of customers. As prohibited by RBI, no interest is paid on

balances in CAs. Since there is no interest involved in CAs, there is no

restriction on the number of transactions or in the type of customers who are

eligible to open such accounts. Owing to the high transaction costs involved

in CAs, the minimum balance that needs to be maintained in CAs is much

higher as compared to Savings bank account.

Current Account is mainly meant for businessmen, companies, firms,

public enterprises, etc. that have many daily banking transactions. Current

Accounts are cheque operated accounts that are meant neither for the

purpose of earning interest and nor for the purpose of savings. These

accounts are meant only for convenience of business and hence they are

non-interest bearing accounts

Depending upon the nature and number of transactions, banks

associate the minimum balance requirement with the level of service

charges. For instance, an account with a large number of transactions will

attract a higher minimum balance stipulation in order to defray a higher

transaction cost involved.

Banks also provide certain value added services to customers, like

facility of withdrawals from current accounts from anywhere, if the

branches are networked. This facility enables a current account holder to

access his funds from anywhere as per his business needs. At times, certain

limitations may be imposed on the amount and frequency of transactions

through anywhere banking.

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Normally, banks charge the customers for any for any service rendered

through a correspondent or partner bank locations or delivery channels. In

such kind of services, ceilings are imposed on payment and collections.

Extra charges are applied in case of transactions in excess of the ceiling.

Similarly, certain banks offer to issue DDs and POs free of charge up to a

certain number per month and chargeable above the prescribed limit.

Services offered for Current Accounts:

Some or all of the following services are offered for CAs:

Payable at par facility

Anywhere banking facility within the specified limits

Cheque collection

DD/PO issue from base branch or correspondent locations with

ceiling as to amount/ number of DDs/POs free of charge for a period

Phone and internet banking facility for viewing the account status

Cheque return, chargeable on per instrument basis

Cash transactions may contain restrictions as to amount that can be

deposited in a month. All additional deposits are charged.

Limits may be imposed for withdrawal of cash at base branch.

Charges may vary if the non-base branch is within the same city or

outside

Practically all other services which are not originally agreed or

exceed the given limits are chargeable. From the foregoing analysis, it

is clear that banks design the product for a particular class of clientele

based on the specific requirements and the cost of rendering such a

service. Banks also decide on the rate chargeable for any service,

based on the minimum balance requirement for a particular account,

the number and nature of transactions.

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Current Account can be opened by:

An individual who has attained majority.

Two or more persons in their joint names.

Sole proprietorship concerns.

Partnership concerns.

Hindu Undivided Family (HUF).

Limited Companies.

Clubs, Societies.

Trusts, Executors and Administrators.

Others - Government and semi Government. Bodies, local authorities

etc.

Documents Required for Opening Current Account

2 passport size photographs

Proof of residence i.e. Passport/driving license/ Telephone /

Electricity Bill/ voters identity card/ Ration card

Introduction of person from an existing account holder.

PAN number or Declaration in form no.60 or 61 according to the

Income Tax Act 1961

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3.1.2 Savings Bank Account

Individuals have to make a variety of payments regularly, such as electricity

bills, school fees, etc. Hence, they require an account that helps them to save

and make regular payments without having to use cash. Also, they would

like to retain some amount in their account as savings for liquidity and earn

some interest on the same. The SB account has been designed in order to

meet such needs of individuals.

The interest rate on these accounts is regulated by the RBI. Presently, the

interest rate on SB account is 3.5 per cent per annum and it is paid every six

months. Interest is calculated depending on the minimum balance in the

account between the 10th and the last day of the month. The account

balance from the 1st to 10th is not considered since it is there will be

maximum inflow through salary and maximum outflow for various regular

payments.

Services offered for SB Accounts

Banks offer different combination of services. The banking services can be

fine tuned to the needs of the customer by offering choice of services which

the customer may frequently need. These services are available free of cost

or at concessional rates depending upon the relationship value of the

customer with the bank.

Following are the facilities that are free of charge for SB Account:

Cash transactions

Clearing of local cheques

Debit cards, which can be used at ATMs and Point of Sales [POS]

terminals

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Access to ATMs

Access to Internet Banking

Access to phone banking services

Access to mobile banking services

Standing instructions for making regular payments

ECS facility for making regular payments, such as

electricity/telephone bills, and also for receiving dividends, interest

and pension

Value added services offered for SB account

Banks have designed the SB accounts with enhanced level of services for

individual who maintain larger deposits with the bank. These customers are

classified as High Net worth Individuals or Private banking customers and

are offered value added services mentioned below:

Home delivery of cash and pick up of cash and cheques from home.

Anywhere banking

Larger withdrawals from ATMs

Withdrawal from ATMs of other banks without payment of any

charge

Faster response to queries at the Phone banking centre

Separate counters for faster service

Dedicated relationship managers

Waiver of service charges for remittances and collection of cheques.

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3.1.3 Fixed Deposits

FDs are repayable after the expiry of the specified term varying form 7 days

to 120 months. Hence they are also known as term deposits. However, they

are not as liquid as savings deposits. The rate of interest paid on FDs is

higher than that of savings deposits. Normally, the longer the term of the

deposit, higher is the rate of interest but a bank may offer lower rate of

interest for a longer period if it expects the rate to dip in future.

Interest on FDs is paid after every three months from the date of the deposit.

The customer has the choice to have the interest reinvested in the FD

account. In such a case, the deposit is called cumulative FD or compound

interest deposit. For such type of deposits, interest is paid with the invested

amount on maturity of the deposit at the end of the term. In case the

customer wants interest to be paid every quarter, it is credited to their SB

account or sent to them by cheque. This is nothing but a simple FD.

All types of entities can make FDs and the minimum amount of deposits

specified by various banks varies from Rs. 1000 to Rs. 10000 with

additional deposits in multiples as stipulated in that particular scheme.

Banks are supposed to deduct tax from the interest paid on FDs if the

amount of interest paid to a customer at any branch exceeds Rs. 10000 in a

financial year. This is applicable to both interests payable or reinvested per

customer / per branch.

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3.1.4 Recurring Deposits

Recurring Deposit [RD] accounts help individuals with regular incomes to

save a fixed amount every month and at the same time earn interest at the

rate applicable to FDs. It is quite similar to making FDs of a fixed amount.

These deposits mature on a specific date in the future along with all the

deposits made each month.

The contract between the customer and the bank is similar to the contract

related to a FD. However, the balances in these deposits cannot be

withdrawn till the date of maturity. Banks do permit premature withdrawals

at a reduced interest applicable to the term ofdeposit but they deduct penalty

for the same. TDS is not applicable to interest paid on RDs. This is a great

attraction for customers since they get interest at FD rates without TDS

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3.2.1 Retail Loans

India has emerges as one of the largest and fastest growing economies of the

world during the last decade. The strengthening of the economy in India has

been fuelled by the convergence of several key influences, like growth of

the key economy sectors, liberalization policies of the government, well-

educated work force and the emergence of a middle class population. India,

having the second largest population in the world, is on its way to become

the world's fourth largest economy in a span of 2 decades.

Due to the restrictive regulatory environment and strict policies of the

government of India until the early 1990's the public sector banks and other

scheduled banks were the major lenders. Even with the entry of private

banks, in the initial phase, there was limited competition between the public

sector banks and private banks. Also, the thrust was not on developing the

economy consistently through credit growth. Hence, banks did not feel the

need to foray into the sectors that were under served.

In the current scenario, banks have been thriving on retail lending. The

focus of banks now, is to increase the probable profits while limiting

possible losses. An increase in market penetration brought about a change in

the business environment and in the way banks conducted their business.

There was a change in terms of innovation in products as well as processes

to cater to the demands of the new age customer on one hand and to protect

the bank from multiple risks on the other.

Retail exposure of banks includes various types of retail credit, such as

residential mortgages, consumer credit cards, automobile and personal

loans, loans against securities, and small business loans.

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Retail Loans - Characteristics

These are small size loans

These loans meet the needs of a large number of customers with well

diversified portfolios

The target customers are generally individuals or small organizations

These loans offer standard products to customers. Very rarely a

customer's requirement is customized

The operations of retail credit are centralized in most of the banks

Bankers can make quick credit related decisions because of

decentralization

These loans are designed to cover varied segments of risks

High volume business

High number of transactions

Salient features of retail loans

Types of facilities:

Loans are the finance facility of a fixed amount extended to meet a

onetime requirement of a customer, for a fixed tenure, to be repaid

over a period in installments. To enable customers to meet their

emergency requirements, bankers permit them an overdraft [OD].

This means that bankers allow the customer to withdraw more than

the credit balance in the customer's current account or give a

temporary loan in the current account itself.

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Secured/Unsecured facilities:

Secured loans are always secured by an underlying asset against

which funding is extended. This lending is also known as asset based

lending. A specific charge is created against such an asset. This gives

the banker/lender the right to take possession of the asset and sell it to

recover the loan in case of default. Unsecured loans do not have any

underlying security and are purely extended based on the

creditworthiness of the borrower. This is also known as non-asset

based lending.

Interest:

On a loan given at a fixed rate, interest is charged throughout the

tenure of the loan at that rate which is fixed at the time of granting the

loan. The customer has to pay interest at the contracted rate

irrespective of whether the interest rate in the market goes up or

down. In case of floating rate of interest, the rate at which the interest

is charged on the loan varies from time to time according to the

movement of interest rate in the market.

Tenure:

The tenure for a loan depends upon the amount of the loan and

repayment capacity of the customer. However, the maximum tenure

permitted depends upon the period over which the asset financed

could depreciate completely.

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Loan to Value ratio:

Loan to Value ration [LVR] refers to the maximum percentage of the

value of the asset that is given as a loan. It varies according to the

nature of the asset and also the rate at which the asset is expected to

depreciate or reduce in value.

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3.2.2 Working Capital

Working capital, also known as net working capital or NWC, is a financial

metric and it represents operating liquidity existing for a business. Along

with fixed assets like plant and equipment,working capital is considered to

be a part of operating capital. It is computed as current assets minus current

liabilities. If current assets are less as compared to current liabilities, the

entity has aworking capital deficiency. Working capital deficiency is also

called a working capital deficit.

Working Capital = Current Assets - Current Liabilities

A company can be having assets and profitability but may be short of

liquidity if its assets are not in a position to be readily converted into cash.

Positiveworking capital is needed to ensure that a firm is able to carry on its

operations and that it has adequate funds to satisfy both - the maturing short-

term debt as well as upcoming operational expenses. Management

ofworking capital involves managing inventories, managing accounts

receivable & payable and cash.

Calculation

Working Capital Ratio [Current ratio] = Current Assets/Current Liabilities

This ration indicates whether a firm has adequate short-term assets for

covering its immediate liabilities. Anything below 1 reflects a negative W/C

(working capital). While anything above 2 indicates that the company is not

investing its excess assets. There exists a general belief that a ratio between

1.2 and 2.0 is sufficient.

30

Current assets and current liabilities comprise of three accounts that are of

special importance. These accounts indicate the areas of the business where

managers have a direct impact:

accounts receivable (current asset)

inventory (current assets), and

accounts payable (current liability)

The current portion of debt (that is payable within 12 months) is critical,

since it represents a short-term claim on current assets and is often secured

by long term assets.General types of short-term debt are lines of credit and

bank loans.

An increase in working capital points out that the business has either

increased current assets (that is received cash, or other current assets) or has

decreased current liabilities, for instance has paid off short-term creditors.

Management of working capital

The management makes use of a combination of policies and techniques for

the purpose of management of working capital. These policies intend to

manage the current assets (generally cash and cash equivalents, inventories

and debtors) and the short term financing, such that cash flows and returns

are acceptable.

Cash management: Identify the cash balance that allows the

business to meet day to day expenses. It reduces cash holding costs.

Inventory management: Identify the level of inventory that allows

for uninterrupted production but lessens the investment in raw

materials - and also minimizes reordering costs – leading to increased

cash flow.

31

Debtor's management: Identify the suitable credit policy, i.e. credit

terms by which the customers will get attracted, such that any impact

on the cash flows and the cash conversion cycle shall be offset by

increased revenue and hence Return on Capital (or vice versa)

Short term financing: Identify the suitable source of financing, on

the basis of the cash conversion cycle: the inventory is preferably

financed by credit granted by the supplier; however, it may be

necessary to make use of a bank loan (or overdraft).

32

3.2.3 Personal Overdraft

12.24% p.a. variable interest rate1

An unsecured Personal Overdraft is a line of credit which allows you

to control your expenditure while giving you financial flexibility

Available on Westpac Choice, and Westpac Choice eAccount 2

Choose your overdraft limit from $250 to $25,000

No minimum monthly repayments when you spend within your

agreed overdraft amounts 3 

Pay interest only on the money you use, when fees and charges are

paid on time

No security required

Low monthly fees 3.  

A convenient way of making sure you have enough money in your account

at all times.

How you can access your money

ATM

EFTPOS

Telephone Banking

Online Banking

Branch

Cheque

Automatic payments.

33

Benefit summary

You only pay interest on the money you use (provided fees and

interest are paid when debited to the account)

You pay a low establishment fee

No security required.

When life gets busy, it's easy to lose track of how much money you have in

your account.

A NAB Personal Overdraft links to your everyday transaction account to

provide you with extra money, up to an agreed limit, to cover everyday

expenses when there's nothing left in your account. It acts as a safety net

when you have multiple direct debits coming out of your account, when

you're waiting for pay day, if an emergency occurs or simply when a lot of

unexpected bills come through at once.

34

3.2.4 Business / Corporate Credit

Business entities require financial assistance for the following:

Acquisition of fixed assets, such as buildings, machinery, furniture,

computer system & so on.

Financing current assets such as inventory or stocks of raw materials,

work in progress, finished goods, & also debtors.

The amount required for financing current assets is called working

capital & it is ever changing because the composition of current assets

changes every day. For example, once raw materials are purchased,

additional amounts are needed to convert it to finished goods. This process

may take anything from a few minutes to a few years depending upon the

industry. For example, in a restaurant, the raw materials will be converted to

finished goods in minutes while building a ship may take one to two years.

After it is converted to finished goods, it would be sold & the buyer, who is

also a debtor, may take some time to pay his dues. When the amount is

finally received, it will be used to repay the amount borrowed from the bank

for purchase of raw materials & manufacturing expenses. Immediately,

fresh amounts would have to be borrowed for purchase of raw materials &

the process repeats itself. Since purchases & sales occur continually,

borrowing & repayment also happen continually. Such financial assistance

is given in the following ways:

Term Loans: funds required for acquiring fixed assets are given as

long-term loans, which are repaid in installments from the profits of

the organization. The period of repayment & periodicity of

installments are fixed, based on the repayment capacity of the

organization, which in turn is based on estimated profits and cash

generation of the organization. As in the case of retail loans,

35

normally, the borrowing organization is required to contribute a

margin.

Leasing: another method of financing fixed assets is for the bank to

buy in its own name and rent it or lease it to the organization for the

period of which the cost of it can be recovered. When an asset is

leased, the bank will own it, while, if the organization buys an asset is

with the help of a loan, the asset will be owned by the organization. If

the organization takes a loan it will the interest and installments,

periodically to the bank.

On the contrary, if the organization leases an asset, the organization

will pay the bank lease rentals, periodically. Either way, the bank

recovers the cost plus an interest over the periodically. Either way, the

bank recovers the cost plus an interest over the period of loan or lease.

Lease transactions are entered into to take advantage of tax provisions

and its popularity has waned in India as the tax provisions have been

tightened to prevent tax avoidance.

36

3.2.5 POST SALE FINANCE OR TRADE FINANCE

Cash credit, packing credit & demand loan facilities are given to

finance working capital requirements for purchase of raw materials. While

organization can use the facilities to finance their requirements over the

entire working capital cycle from purchase of raw materials to recovery of

sale proceeds from debtors. However, for financing the post sale

requirements, more efficient facilities are available. These are more efficient

because repayment can be monitored better & the rate of interest could be

cheaper for the customer.

The various modes of post sale finance are as follows:

CHEQUE PURCHASE: Cheques issued by purchaser of goods have

to be sent for clearing or collection & this causes delay of one to

several days in getting the funds. Banks agree to lend the amount of

the cheque as soon as the cheque is deposited & the advance is

recovered when the cheques are realized. At the time of giving the

advances itself, the bank will recover the interest for the estimated

time it will take for the cheque to be realized. If it takes longer,

additional interest is recovered from the proceeds of the cheque. This

facility is called cheque purchase.

BILL PURCHASE: Banks also give advance against documentary

bills for collection & recovering the amount when the draee pays the

amount. In case of a demand bill, the date of which it will be paid is

uncertain. The drawee may pay the bill as soon as it is presented to

him or he may take a few days to do so.

Therefore, as in the case of cheque purchase, interest for the

estimated time for realization of the bill is recovered at the time of

purchase. Additional interest is recovered or excess refunded on

37

realization of the bill. In case the bill is dishonoured, the amount is

recovered from the customer.

BILL DISCOUNT: In the case of a Usance Bill, the date of payment

is certain as it becomes payable after a certain number of days after it

is accepted or from the date of the bill. Therefore, the bank is able to

calculate the exact amount of interest due on the bill & recover it

upfront. Interest recovered at the time of advance is called discount.

When money is advanced against a usance bill for collection, it is

called bill discounting. In case of bill purchase also, the interest is

recovered at the time of advance.

LETTER OF CREDIT: The Bill Collection facility reduces the risk

in trade transactions for both the buyer & the seller. The seller is

certain that the buyer will not get the possession of the goods till he

pays for it & the buyer is certain that as soon as he pays for it, he will

get the goods. The letter will state that if the seller dispatches the

goods according to the conditions, the payment of the bill submitted

by the buyer guaranteed by the bank. Conditions could be quality,

quantity, price & date of dispatch. Such a letter from the buyer’s bank

to the seller, guaranteeing payment of the bill drawn by the seller

provided he has complied with the conditions specified in the letter, is

called a Letter of Credit or LC in short. Therefore LC facility is also

treated as a credit facility by the bank but it is called a Non Fund

Based Facility, as the bank does not advances any funds. A cash

credit or loan is Fund Based Facility.

BILL NEGOTIATION: When a bill accompanied by the LC is

purchased (Demand Bill) or discounted (Usance Bill), it is called bill

negotiation to distinguish it from bill purchase or discount. When a

bill under LC is negotiated, the risk for the negotiating bank is much

less, as the LC is issuing bank guarantees payment.

38

GUARANTEE: LCs are guarantees issued by banks on behalf of

buyers to facilitate trade transactions. For other types of transactions,

customers approach banks to issue guarantees on their behalf. Also,

the government may impose a condition that the work should be

completed within two months & if they fail to complete it, they

should pay a penalty. The government may insist that a bank should

guarantee their performance or pay a penalty in case of failure to

perform. There are many more such transactions for which bank

guarantee are insisted.

39

CHAPTER 4

PAYEMENT SYSTEMS

4.1 PAYMENT SERVICES

4.1.1 CHEQUES

4.1.2 PAY ORDERS

4.1.3 DEMAND DRAFT

4.1.4 DEBIT CARD

4.1.5 CREDIT CARD

4.1.6 MULTICITY CHEQUE

4.1.7 ELECTRONIC FUND TRANSFER

4.2 COLLECTION SERVICES

4.2.1 E.C.S.

4.2.2 CASH MANAGEMENT SERVICE

4.2.3 BILL FOR COLLECTION

40

4.1.1 CHEQUES

History

The cheque had its origins in the ancient banking system, in which bankers

would issue orders at the request of their customers, to pay money to

identified payees. Such an order was referred to as a bill of exchange. The

use of bills of exchange facilitated trade by eliminating the need for

merchants to carry large quantities of currency (e.g. gold) to purchase goods

and services. A draft is a bill of exchange which is not payable on demand

of the payee. (However, draft in the U.S. Uniform Commercial Code today

means any bill of exchange, whether payable on demand or at a later date; if

payable on demand it is a "demand draft", or if drawn on a financial

institution, a cheque.)

Parts of a cheque based on a UK example

1. drawee, the financial institution where the cheque can be presented

for payment

2. payee

3. date of issue

4. amount of currency

5. drawer, the person or entity making the cheque

6. signature of drawer

7. Machine readable routing and account information.

41

A cheque or check (American English) is a piece of paper (usually)

that orders a payment of money. The person writing the cheque, the drawer,

usually has a chequing account where their money is deposited. The drawer

writes the various details including the money amount, date, and a payee on

the cheque, and signs it, ordering their bank, know as the drawee, to pay this

person or company the amount of money stated.

Cheques are a type of bill of exchange and were developed as a way to

make payments without the need to carry around large amounts of gold and

silver. Paper money also evolved from bills of exchange, and are similar to

cheques in that they are a written order to pay the given amount to whoever

had it in their possession (the "bearer").

Technically, a cheque is a negotiable instrument [ instructing a financial

institution to pay a specific amount of a specific currency from a specified

demand account held in the drawer/depositor's name with that institution.

Both the drawer and payee may be natural persons or legal entities.

Although cheques have been around since at least 9th century, it was during

the 20th century that cheques became a highly popular non-cash method for

making payments and the usage of cheques peaked. By the second half of

the 20th century, as cheque processing became automated, billions were

issued each year with volumes peaking in or around the early 1990s. Since

that time cheque usage has seen significant decline as electronic payment

systems started to replace physical cheques. In a number of countries

cheques have become a marginal payment system or have been phased out

completely.

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Variations on regular cheques

In addition to reglar cheques, a number of variations were developed to

address specific needs or to address issues when using a regular cheque.

Cashier’s cheques and Bank drafts

Cashier's cheques and banker's drafts also known as a bank cheque or

treasurer's cheque, are cheques issued against the funds of a financial

institution rather than an individual account holder. Typically, the term

cashier's cheques are used in the US and banker's drafts are used in the UK.

The mechanism differs slightly from country to country but in general the

bank issuing the cashiers cheque or bankers draft will allocate the funds at

the point the cheque is drawn. This provides a guarantee, save for a failure

of the bank, that it will be honoured. Cashier's cheques are perceived to be

as good as cash but they are still a cheque, a misconception often exploited

by scam artists. A lost or stolen cheque can still stopped like any other

cheque so payment is not completely guaranteed.

Certified cheque

When a certified cheque is drawn, the bank operating the account verifies

there are currently sufficient funds in the drawer's account to honour the

cheque. Those funds are then set aside in the bank's internal account until

the check is cashed or returned by the payee. Thus, a certified check cannot

"bounce", and, in this manner, its liquidity is similar to cash, absent failure

of the bank. The bank indicates this fact by making a notation on the face of

the cheque (technically called an acceptance).

43

Payroll cheque

A cheque used to pay wages may be referred to as a payroll cheque. Even

when the use of cheques for paying wages and salaries became rare, the

vocabulary "pay cheque" still remained commonly used to describe the

payment of wages and salaries. Payroll cheques issued by the military to

soldiers, or by some other government entities to their employees,

beneficiants, and creditors, are referred to as warrants.

Warrants

Warrants look like cheques and clear through the banking system like

cheques, but are not drawn against cleared funds in a deposit account. A

cheque differs from a warrant in that the warrant is not necessarily payable

on demand and may not be negotiable.[22] They are often issued by

government entities such as the military to pay wages or supplies. In this

case they are an instruction to the entities treasurer department to pay the

warrant holder on demand or after a specified maturity date.

Travellers cheque

A traveller's cheque is designed to allow the person signing it to make an

unconditional payment to someone else as a result of paying the account

holder for that privilege. Traveller's cheques can usually be replaced if lost

or stolen and people often used to use them on vacation instead of cash as

many businesses used to accept traveller's cheques as currency. The use of

credit or debit cards has, however, begun to replace the traveller's cheque as

the standard for vacation money due to their convenience and additional

security for the retailer. This has resulted in many businesses no longer

accepting traveller's cheques.

44

Money or Postal order

A cheque sold by a post office or merchant such as a grocery for payment

by a third party for a customer is referred to as a money order or postal

order. These are paid for in advance when the order is drawn and are

guaranteed by the institution that issues them and can only be paid to the

named third party. This was a common way to send low value payments to

third parties avoiding the risks associated with sending cash via the mail,

prior to the advent of electronic payment methods.

Oversized cheques

Oversized cheques are often used in public events such as donating money

to charity or giving out prizes such as Publishers Clearing House. The

cheques are commonly 18 by 36 inches (46 × 91 cm) in size,[23] however,

according to the Guinness Book of World Records, the largest ever is 12 by

25 meters (39 × 82 ft).[24] Regardless of the size, such cheques can still be

redeemed for their cash value as long as they have the same parts as a

normal cheque, although usually the oversized cheque is kept as a souvenir

and a normal cheque is provided.[25] A bank may levy additional charges for

clearing an oversized cheque.

Payment vouchers

Some public assistance programs such as the Special Supplemental

Nutrition Program for Women, Infants and Children, or Aid to Families

with Dependent Children make vouchers available to their beneficiaries,

which are good up to a certain monetary amount for purchase of grocery

items deemed eligible under the particular programme. The voucher can be

deposited like any other cheque by a participating supermarket or other

approved business.

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4.1.2 PAYORDERS

A Banker's Cheque is a cheque issued by the Bank payable to the order of

specified payee for payment within a local area. Any variations of rate will

be decided by Credit Committee on Remittances products.

Procedure for issuing Bankers cheque or PO

1. Filling up and signing the requisition slip.

2. Paying amount to the counter

3. Cashier will scrutinize your request

4. He will enter transaction in their system by debiting cash in case you

are paying cash and your account in case you are giving a cheque.

5. Next step is printing of PO

6. Printed PO will be sent to Customer service manager along with

requisition slip. The CSM will sign after verification.

7. Two authorities should sign in case of PO above 200000

46

Features and Benefits of PAYORDERS:

All Banker's Cheques are pre-printed with the crossing "NOT

NEGOTIABLE".

To be issued for use only within the clearing area of the issuing Bank and if

cleared outside the clearing area then the normal outstation cheque

commission is payable.

Should be accepted as good by the payee as it has been paid for by the

customer at time of issue. It cannot be returned except for technical reasons.

To be used by customers who do not have a current account but wish to

make payments by cheques, or in situations when a personal cheque is

unacceptable.

Issued in Malaysian Ringgit only.

47

4.2.3 DEMAND DRAFT

What Does Demand Draft Mean?

A method used by individuals to make transfer payments from one bank

account to another. Demand drafts are marketed as a relatively secure

method for cashing checks. The major difference between demand drafts

and normal checks is that demand drafts do not require a signature in order

to be cashed.

Also known as "remotely created checks".

Demand drafts were originally designed to benefit legitimate telemarketers

who needed to withdraw funds from customer checking accounts. However,

the lack of a signature required to authorize the transfers have left demand

drafts open to fraudulent use. The only information needed to create a

demand draft is a bank account number and a bank routing number - this

information is found on a standard check.

48

4.2.4 DEBIT CARD

A debit card (also known as a bank card or check card) is a plastic card

that provides an alternative payment method to cash when making

purchases. Functionally, it can be called an electronic cheque, as the funds

are withdrawn directly from either the bank account, or from the remaining

balance on the card. In some cases, the cards are designed exclusively for

use on the Internet, and so there is no physical card.[1][2]

In many countries the use of debit cards has become so widespread that their

volume of use has overtaken the cheque and, in some instances, cash

transactions. Like credit cards, debit cards are used widely for telephone and

Internet purchases and, unlike credit cards, the funds are transferred

immediately from the bearer's bank account instead of having the bearer pay

back the money at a later date.

Debit cards may also allow for instant withdrawal of cash, acting as the

ATM card for withdrawing cash and as a cheque guarantee card. Merchants

may also offer cashback facilities to customers, where a customer can

withdraw cash along with their purchase.

49

Advantages and Disadvantages

Debit and check cards, as they have become widespread, have revealed

numerous advantages and disadvantages to the consumer and retailer alike.

The following allegations seem to be based only on the current situation

within the U.S.A. Please read with caution as they may not apply to any

other countries.

Advantages are as follows:

A consumer who is not credit worthy and may find it difficult or

impossible to obtain a credit card can more easily obtain a debit card,

allowing him/her to make plastic transactions.

For most transactions, a check card can be used to avoid check

writing altogether. Check cards debit funds from the user's account on

the spot, thereby finalizing the transaction at the time of purchase,

and bypassing the requirement to pay a credit card bill at a later date,

or to write an insecure check containing the account holder's personal

information.

Like credit cards, debit cards are accepted by merchants with less

identification and scrutiny than personal checks, thereby making

transactions quicker and less intrusive. Unlike personal checks,

merchants generally do not believe that a payment via a debit card

may be later dishonored.

Unlike a credit card, which charges higher fees and interest rates

when a cash advance is obtained, a debit card may be used to obtain

cash from an ATM or a PIN-based transaction at no extra charge,

other than a foreign ATM fee.

50

The Debit card has many disadvantages as opposed to cash or credit:

Use of a debit card is not usually limited to the existing funds in the

account to which it is linked, most banks allow a certain threshold

over the available bank balance which can cause overdraft fees if the

customer does not depend on their own records of spending.

Many banks are now charging over-limit fees or non-sufficient funds

fees based upon pre-authorizations, and even attempted but refused

transactions by the merchant (some of which may not even be known

by the client).

Many merchants mistakenly believe that amounts owed can be

"taken" from a customer's account after a debit card (or number) has

been presented, without agreement as to date, payee name, amount

and currency, thus causing penalty fees for overdrafts, over-the-limit,

amounts not available causing further rejections or overdrafts, and

rejected transactions by some banks.

In some countries debit cards offer lower levels of security protection

than credit cards. Theft of the users PIN using skimming devices can

be accomplished much easier with a PIN input than with a signature-

based credit transaction. However, theft of users' PIN codes using

skimming devices can be equally easily accomplished with a debit

transaction PIN input, as with a credit transaction PIN input, and theft

using a signature-based credit transaction is equally easy as theft

using a signature-based debit transaction.

In many places, laws protect the consumer from fraud much less than

with a credit card. While the holder of a credit card is legally

responsible for only a minimal amount of a fraudulent transaction

made with a credit card, which is often waived by the bank, the

consumer may be held liable for hundreds of dollars, or even the

51

entire value of fraudulent debit transactions. The consumer also has a

shorter time (usually just two days) to report such fraud to the bank in

order to be eligible for such a waiver with a debit card, whereas with

a credit card, this time may be up to 60 days. A thief who obtains or

clones a debit card along with its PIN may be able to clean out the

consumer's bank account, and the consumer will have no recourse.

Consumer Protection

Consumer protections vary, depending on the network used. Visa and

MasterCard, for instance, prohibit minimum and maximum purchase sizes,

surcharges, and arbitrary security procedures on the part of merchants.

Merchants are usually charged higher transaction fees for credit

transactions, since debit network transactions are less likely to be

fraudulent. This may lead them to "steer" customers to debit transactions.

Consumers disputing charges may find it easier to do so with a credit card,

since the money will not immediately leave their control. Fraudulent

charges on a debit card can also cause problems with a checking account

because the money is withdrawn immediately and may thus result in an

overdraft or bounced checks. In some cases debit card-issuing banks will

promptly refund any disputed charges until the matter can be settled, and in

some jurisdictions the consumer liability for unauthorized charges is the

same for both debit and credit cards.

In some countries, like India and Sweden, the consumer protection is the

same regardless of the network used. Some banks set minimum and

maximum purchase sizes, mostly for online-only cards. However, this has

nothing to do with the card networks, but rather with the bank's judgement

of the person's age and credit records. Any fees that the customers have to

pay to the bank are the same regardless of whether the transaction is

52

conducted as a credit or as a debit transaction, so there is no advantage for

the customers to choose one transaction mode over another. Shops may add

surcharges to the price of the goods or services in accordance with laws

allowing them to do so. Banks consider the purchases as having been made

at the moment when the card was swiped, regardless of when the purchase

settlement was made. Regardless of which transaction type was used, the

purchase may result in an overdraft because the money is considered to have

left the account at the moment of the card swiping.

53

4.1.5 CREDIT CARD

A credit card is a small plastic card issued to users as a system of payment.

It allows its holder to buy goods and services based on the holder's promise

to pay for these goods and services.[1] 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. Usage of the

term "credit card" to imply a credit card account is a metonym.

A credit card is different from a charge card: a charge card requires the

balance to be paid in full each month. In contrast, credit cards allow the

consumers a continuing balance of debt, subject to interest being charged.

Security problems and solutions

Credit card security relies on the physical security of the plastic card as well

as the privacy of the credit card number. Therefore, whenever a person other

than the card owner has access to the card or its number, security is

potentially compromised. Once, merchants would often accept credit card

numbers without additional verification for mail order purchases. It's now

common practice to only ship to confirmed addresses as a security measure

to minimise fraudulent purchases. Some merchants will accept a credit card

54

number for in-store purchases, whereupon access to the number allows easy

fraud, but many require the card itself to be present, and require a signature.

A lost or stolen card can be cancelled, and if this is done quickly, will

greatly limit the fraud that can take place in this way. For internet purchases,

there is sometimes the same level of security as for mail order (number

only) hence requiring only that the fraudster take care about collecting the

goods, but often there are additional measures.[citation needed] European banks

can require a cardholder's security PIN be entered for in-person purchases

with the card.

The PCI DSS is the security standard issued by The PCI SSC (Payment

Card Industry Security Standards Council). This data security standard is

used by acquiring banks to impose cardholder data security measures upon

their merchants.

The low security of the credit card system presents countless opportunities

for fraud. This opportunity has created a huge black market in stolen credit

card numbers, which are generally used quickly before the cards are

reported stolen.

The goal of the credit card companies is not to eliminate fraud, but to

"reduce it to manageable levels".[12] This implies that high-cost low-return

fraud prevention measures will not be used if their cost exceeds the potential

gains from fraud reduction - as would be expected from organisations whose

goal is profit maximisation.

Internet fraud may be by claiming a chargeback which is not justified

("friendly fraud"), or carried out by the use of credit card information which

can be stolen in many ways, the simplest being copying information from

retailers, either online or offline. Despite efforts to improve security for

55

remote purchases using credit cards, security breaches are usually the result

of poor practice by merchants. For example, a website that safely uses SSL

to encrypt card data from a client may then email the data, unencrypted,

from the webserver to the merchant; or the merchant may store unencrypted

details in a way that allows them to be accessed over the Internet or by a

rogue employee; unencrypted card details are always a security risk. Even

encryption data may be cracked.

Controlled Payment Numbers which are used by various banks such as

Citibank (Virtual Account Numbers), Discover (Secure Online Account

Numbers, Bank of America (Shop Safe), 5 banks using eCarte Bleue and

CMB's Virtualis in France, and Swedbank of Sweden's eKort product are

another option for protecting against credit card fraud. These are generally

one-time use numbers that front one's actual account (debit/credit) number,

and are generated as one shops on-line. They can be valid for a relatively

short time, for the actual amount of the purchase, or for a price limit set by

the user. Their use can be limited to one merchant. If the number given to

the merchant is compromised, it will be rejected if an attempt is made to use

it again.

A similar system of controls can be used on physical cards. For example if a

consumer has a Chip and PIN (EMV) enabled card the card can be limited

so that it be used only at point of sale locations (i.e. restricted from being

used on-line) and only in a given territory (i.e. only for use in Canada). This

technology provides the option for banks to support many other controls too

that can be turned on and off and varied by the credit card owner in real

time as circumstances change (i.e., they can change temporal, numerical,

geographical and many other parameters on their primary and subsidiary

cards). Apart from the obvious benefits of such controls: from a security

perspective this means that a customer can have a Chip and PIN card

56

secured for the real world, and limited for use in the home country. In this

eventuality a thief stealing the details will be prevented from using these

overseas in non chip and pin (EMV) countries. Similarly the real card can

be restricted from use on-line so that stolen details will be declined if this

tried. Then when card users shop online they can use virtual account

numbers. In both circumstances an alert system can be built in notifying a

user that a fraudulent attempt has been made which breaches their

parameters, and can provide data on this in real time. This is the optimal

method of security for credit cards, as it provides very high levels of

security, control and awareness in the real and virtual world. Furthermore it

requires no changes for merchants at all and is attractive to users, merchants

and banks, as it not only detects fraud but prevents it.[citation needed]

Additionally, there are security features present on the physical card itself in

order to prevent counterfeiting. For example, most modern credit cards have

a watermark that will fluoresce under ultraviolet light. A Visa card has a

letter V superimposed over the regular Visa logo and a Mastercard has the

letters MC across the front of the card. Older Visa cards have a bald eagle or

dove across the front. In the aforementioned cases, the security features are

only visible under ultraviolet light and are invisible in normal light. Similar

security features are present in paper currency and certain ID cards in the

United States, as well.[citation needed]

The Federal Bureau of Investigation and U.S. Postal Inspection Service are

responsible for prosecuting criminals who engage in credit card fraud in the

United States, but they do not have the resources to pursue all criminals. In

general, federal officials only prosecute cases exceeding US$5,000. Three

improvements to card security have been introduced to the more common

credit card networks but none has proven to help reduce credit card fraud so

far. First, the on-line verification system used by merchants is being

57

enhanced to require a 4 digit Personal Identification Number (PIN) known

only to the card holder. Second, the cards themselves are being replaced

with similar-looking tamper-resistant smart cards which are intended to

make forgery more difficult. The majority of smart card (IC card) based

credit cards comply with the EMV (Europay MasterCard Visa) standard.

Third, an additional 3 or 4 digit Card Security Code (CSC) is now present

on the back of most cards, for use in card not present transactions.

Stakeholders at all levels in electronic payment have recognized the need to

develop consistent global standards for security that account for and

integrate both current and emerging security technologies. They have begun

to address these needs through organizations such as PCI DSS and the

Secure POS Vendor Alliance.[13]

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4.1.6 MULTICITY CHEQUES

"Multi City Cheque" or MCC is a facility wherein the customer can issue

cheques drawn at the base branch and payable at any branch at remote

centre. These cheques will be treated as local cheques at the remote branch.

There will be no collection charges and the credit will be given on the same

day, as applicable to local cheques. Even if the cheque is dropped at any

other bank other than the base bank, there will not be any collection charges.

For example, if you are paid a Multi city cheque by an account holder at a

SBI branch in Delhi and you drop the same at any bank in Mumbai where

you hold an account, then there will not be any collection charges.

Who can avail this facility?

The facility of Multi City Cheques is available to all types of SB account

holders, Current account holders and COD/ SOD account holders who fulfill

the following eligibility criteria:

Savings bank account with a monthly minimum balance of Rs. 10,000/-      

Current accounts with a monthly minimum balance of Rs. 50,000/-

COD/ SOD accounts with a sanctioned minimum limit of Rs. 50,000/-

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Guidelines for availing MCC

Apply for the MCC facility in the prescribed application form available at

all the cluster-connected branches of the Bank.

MCC Cheques cannot be used for withdrawing cash, as they are pre-printed

with A/c Payee Crossing. 

Multi City Cheques are payable at all the cluster linked centres, subject to

the availability of clear balance in the account of the customer, and the

availability of the link between the branches.

What are the charges applicable for MCC?

Transaction Charges: This facility is offered free of any transaction

charges at present.

Cheque Leaf Charges: Rs.5/- per leaf in case of both SB and CD/COD/SOD

accounts. No free cheques would be given. The accounts availing Multi-city

cheque facility can also avail ordinary cheque books.

Cheque Bounce Charges: In the incident of a Multi-city cheque bounce due

to financial reasons, Rs.100/- will be charged.

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4.1.7 ELECTRONIC FUND TRANSFER

Electronic funds transfer or EFT refers to the computer-based systems

used to perform financial transactions electronically. An EFT is the

electronic exchange or transfer of money from one account to another,

either within the same financial institution or across multiple institutions

The term is used for a number of different concepts:

Cardholder-initiated transactions, where a cardholder makes use of a

payment card

Direct deposit payroll payments for a business to its employees,

possibly via a payroll services company

Direct debit payments, sometimes called electronic checks, for which

a business debits the consumer's bank accounts for payment for goods

or services

Electronic bill payment in online banking, which may be delivered by

EFT or paper check

Transactions involving stored value of electronic money, possibly in a

private currency

Wire transfer via an international banking network (generally carries

a higher fee)

Electronic Benefit Transfer

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In 1978 U.S. Congress passed the Electronic Funds Transfer Act to establish

the rights and liabilities of consumers as well as the responsibilities of all

participants in EFT activities in the United States.

Defn-

"NEFT Service Centre" means an office or branch of a bank in a

centre

designated by that bank to be responsible for processing, sending or

receiving NEFT

SFMS message of that bank in that Centre and to do all other functions

entrusted to

an NEFT Service Centre by or under these Regulations. NEFT Service

Centre is

referred to as "Sending NEFT Service Centre" when it originates an NEFT

SFMS

message for Funds Transfer. NEFT Service Centre is referred to as

"Receiving NEFT

Service Centre" when it receives NEFT SFMS message from NEFT Centre.

INTRODUCTION

1.1 Reserve Bank of India has introduced an electronic funds transfer

system called "The Reserve Bank of India National Electronic Funds

Transfer System" (herein after may be referred to as "NEFT System" or

"System"). A set of procedural guidelines to be followed are detailed in this

document.

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Objects

1.2 The objects of the NEFT System are:

(1) to establish an Electronic Funds Transfer System to facilitate an

efficient, secure, economical, reliable and expeditious system of funds

transfer and clearing in the banking sector throughout India, and

(2) to relieve the stress on the existing paper based funds transfer and

clearing system.

Coverage

1.3 These guidelines shall apply to participating banks/ and branches in the

system as notified by Reserve Bank of India from time to time on its official

Web-sit

Eligibility criteria

3.1 To be eligible to apply for admission, an applicant

1) shall be a bank.

2) shall be a member of Real Time Gross Settlement System (RTGS)

3) shall have installed SFMS

4) shall meet the other prescribed eligibility criteria/conditions , which are

notified by RBI from time to time

Provided that, all or any of the above conditions may be relaxed or

dispensed with, if

so decided by the Reserve Bank of India.

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Procedure for Admission

3.2 Any bank or institution eligible to be admitted in the NEFT System may

submit to the Nodal Department, duly authenticated application, containing

full particulars in the form specified at Annexure-I (Form: NEFT-IA). Every

application shall be accompanied by an undertaking in the specified form to

abide by the Procedural

Guidelines in the event of admission.

3. 3 The Nodal Department shall issue Letter of Admission as specified in

Annexure-II (Form: NEFT-IB) to every bank admitted into the NEFT

System.

CONDITIONS OF TRANSFER

1. Remitting Bank shall not be liable for any loss of damage arising or

resulting from delay in transmission delivery or non delivery of Electronic

message or any mistake, omission, or error in transmission or delivery

thereof or in deciphering the message from any cause whatsoever or from its

misinterpretation received or the action of the destination Bank or any act or

even beyond control.

2. All payment instructions should be checked carefully by the remitter.

3. Messages received after cut-off time will be sent in the next batch.

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4.2.1 ELECTRONIC CLEARING SERVICES

ECS (Credit Clearing)

This is a new method of payment whereby the institutions having to make a

large number of payments (such as interest / dividend) can directly deposit

the amount into the bank accounts of the share-holders/ depositors/ investors

without having to issue paper instruments.

Bulk and repetitive payments like interest/dividend are mostly paper based

involving printing of warrants (in costly MICR format) , dispatching them

by post (most often by Regd. post) and reconciliation thereof after payment

by the agency banks. The difficulties are-

It requires an expensive administrative machinery for printing,

dispatch and reconciliation<

Bunching of a large number of instruments in clearing results in

operational bottlenecks and pressures on the cheque processing

system

Chances of loss of instruments in transit and their fraudulent

encashment

The customer has also to keep track of the receipt/non-receipt of the

instrument and take efforts in depositing the instrument to the bank

on receipt of the same;

Banks find processing of such a large volume of instruments not only

error prone and monotonous, but also a strain on the cheque clearing

system.

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How does ECS (Credit Clearing ) work ?

Step 1 : The corporate body institution (called “User” ) which has to

make payments to a large number of customers/investors would

prepare the payment data on a magnetic media (i.e., tape or floppy)

and submit the same to its banker (Sponsor Bank).

Step 2 : The Sponsor Bank would present the payment data to the

local Bankers’ Clearing House (managed by Reserve Bank of India at

15 centres and by State Bank of India or Associate banks at other

centres) authorising the Manager of the Clearing House to debit the

Sponsor Bank’s account and credit the accounts (Destination Bank)

of the banks where the beneficiaries of the transactions maintain their

accounts.

Step 3 : On receiving this authorisation, the Clearing House will

process the data and work out an inter-bank funds settlement.

Step 4 : The Clearing House will furnish to the service branches of

the destination banks branch-wise credit reports indicating the

beneficiary details such as the names of the branches where the

accounts are maintained, the names of the beneficiaries, account type,

account numbers and the respective amounts.

Step 5 : The service branches will in turn pass on the advices to the

concerned branches of their bank, which will credit the beneficiaries’

accounts on the appointed date.

How does this Scheme benefit a corporate body / institution?

Savings in administrative cost presently being incurred for printing of

paper instruments in MICR format and dispatching them by

Registered Post.

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Loss of instruments in transit or fraudulent encashment thereof totally

eliminated.

Reconciliation of transactions is made automatic. By the time the

ECS cycle is completed, the user institution gets an electronic data

file from its bank with the date of payment and banker’s confirmation

thereon.

Cash management becomes easier as arrangement for funds is

required to be made only on the specified date.

Ensuring better customer/investor service.

Paying the way the best companies in the world pay to their share

holders/ investors, customers

How does the Scheme benefit the beneficiary customer ?

Payment on the due date

Effortless receipt – No need for visiting the bank for depositing the

dividend/interest warrant.

Loss of instrument in transit or fraudulent encashment thereof and

consequent correspondence with the company are totally eliminated

ECS (Debit Clearing)

The Reserve Bank of India has introduced the Electronic Clearing

Service(Debit) scheme to provide faster method of effecting periodic and

repetitive payments by ‘direct debit’ to customers’ accounts(duly

authorised) thereby minimising paper transactions and increasing customer

satisfaction. Electronic Clearing Service (Debit) envisages “a large number

of debits and one credit” in the case of collection of electricity bills,

telephone bills, loan installments, insurance premia, Club fees, etc by the

Utility Service Providers.

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As per the existing system for collection of electricity bills and telephone

bills, the customers/subscribers are required to go to the collection centres

/designated banks and stand in long queues for payment of bills/dues. There

would not be any cash transaction or payment through cheques in the new

system. There is an overall limit of Rs.5,00,000 per transaction. Levy of

service charges by both sponsoring bank and destination bank is now left

entirely to the discretion of respective banks. A sum of Rs.0.50 p. only is

collected by NCC, RBI towards Clearing House charges. Utility service

providers like MTNL, Telephone/Mobile companies, Telecom Departments,

State Electricity Boards, Banks (for collection of credit cards dues) LIC,

Housing Finance Companies, Intermediaries and Clubs etc are making use

of ECS(Debit) Clearing system.

How does ECS(Debit) work?

Utility Companies, banks/institutions receiving periodic/repetitive

payments towards electricity bills/telephone bills/loan

installments/insurance premia initially collect mandates from their

customers / subscribers for collection of amounts due from them by

direct debit to their accounts with banks. The mandate provides

details such as the name, account number, name of bank/branch etc.

duly certified by the bank concerned.

Based on the details furnished in the mandates, the user company

prepares transaction data on electronic media and submits the

encrypted data to the local Clearing House, through its Sponsor bank.

After due validation of the data, the local clearing house processes the

same and arrives at the inter-bank settlement as also generates bank-

wise/branch-wise reports(hard copies)

NCC debits the destination banks’ accounts with clearing house and

simultaneously affords a consolidated credit to the sponsor bank’s

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account and furnishes the bank-wise and branch-wise reports to the

service branches of destination banks.

Service branches forward the branch-wise reports to the respective

branches for debiting the accounts of customers with the indicated

amounts.

Benefits under ECS(Debit)

Faster Collection of bills by the companies and better cash

management by them

eliminates the need to go to the collection centres/banks by the

customers and no need to stand in long ‘Q’s for payment

automatic debiting to the accounts once the mandates are given by the

customers, to that effect cuts down the procedural delay.

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4.2.2 CASH MANAGEMENT SERVICES

Cash management services generally offered

The following is a list of services generally offered by banks and utilised by

larger businesses and corporations:

Account Reconcilement Services: Balancing a checkbook can be a

difficult process for a very large business, since it issues so many

checks it can take a lot of human monitoring to understand which

checks have not cleared and therefore what the company's true

balance is. To address this, banks have developed a system which

allows companies to upload a list of all the checks that they issue on a

daily basis, so that at the end of the month the bank statement will

show not only which checks have cleared, but also which have not.

More recently, banks have used this system to prevent checks from

being fraudulently cashed if they are not on the list, a process known

as positive pay.

Advanced Web Services: Most banks have an Internet-based system

which is more advanced than the one available to consumers. This

enables managers to create and authorize special internal logon

credentials, allowing employees to send wires and access other cash

management features normally not found on the consumer web site.

Armored Car Services (Cash Collection Services): Large retailers

who collect a great deal of cash may have the bank pick this cash up

via an armored car company, instead of asking its employees to

deposit the cash.

Automated Clearing House: services are usually offered by the cash

management division of a bank. The Automated Clearing House is an

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electronic system used to transfer funds between banks. Companies

use this to pay others, especially employees (this is how direct deposit

works). Certain companies also use it to collect funds from customers

(this is generally how automatic payment plans work). This system is

criticized by some consumer advocacy groups, because under this

system banks assume that the company initiating the debit is correct

until proven otherwise.

Balance Reporting Services: Corporate clients who actively manage

their cash balances usually subscribe to secure web-based reporting of

their account and transaction information at their lead bank. These

sophisticated compilations of banking activity may include balances

in foreign currencies, as well as those at other banks. They include

information on cash positions as well as 'float' (e.g., checks in the

process of collection). Finally, they offer transaction-specific details

on all forms of payment activity, including deposits, checks, wire

transfers in and out, ACH (automated clearinghouse debits and

credits), investments, etc.

Cash Concentration Services: Large or national chain retailers often

are in areas where their primary bank does not have branches.

Therefore, they open bank accounts at various local banks in the area.

To prevent funds in these accounts from being idle and not earning

sufficient interest, many of these companies have an agreement set

with their primary bank, whereby their primary bank uses the

Automated Clearing House to electronically "pull" the money from

these banks into a single interest-bearing bank account.

Lockbox - Retail: services: Often companies (such as utilities) which

receive a large number of payments via checks in the mail have the

71

bank set up a post office box for them, open their mail, and deposit

any checks found. This is referred to as a "lockbox" service.

Lockbox - Wholesale: services: are for companies with small

numbers of payments, sometimes with detailed requirements for

processing. This might be a company like a dentist's office or small

manufacturing company.

Positive Pay: Positive pay is a service whereby the company

electronically shares its check register of all written checks with the

bank. The bank therefore will only pay checks listed in that register,

with exactly the same specifications as listed in the register (amount,

payee, serial number, etc.). This system dramatically reduces check

fraud.

Reverse Positive Pay: Reverse positive pay is similar to positive pay,

but the process is reversed, with the company, not the bank,

maintaining the list of checks issued. When checks are presented for

payment and clear through the Federal Reserve System, the Federal

Reserve prepares a file of the checks' account numbers, serial

numbers, and dollar amounts and sends the file to the bank. In reverse

positive pay, the bank sends that file to the company, where the

company compares the information to its internal records. The

company lets the bank know which checks match its internal

information, and the bank pays those items. The bank then researches

the checks that do not match, corrects any misreads or encoding

errors, and determines if any items are fraudulent. The bank pays only

"true" exceptions, that is, those that can be reconciled with the

company's files.

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Sweep accounts : are typically offered by the cash management

division of a bank. Under this system, excess funds from a company's

bank accounts are automatically moved into a money market mutual

fund overnight, and then moved back the next morning. This allows

them to earn interest overnight. This is the primary use of money

market mutual funds.

Zero Balance Accounting: can be thought of as somewhat of a hack.

Companies with large numbers of stores or locations can very often

be confused if all those stores are depositing into a single bank

account. Traditionally, it would be impossible to know which

deposits were from which stores without seeking to view images of

those deposits. To help correct this problem, banks developed a

system where each store is given their own bank account, but all the

money deposited into the individual store accounts are automatically

moved or swept into the company's main bank account. This allows

the company to look at individual statements for each store. U.S.

banks are almost all converting their systems so that companies can

tell which store made a particular deposit, even if these deposits are

all deposited into a single account. Therefore, zero balance

accounting is being used less frequently.

Wire Transfer: A wire transfer is an electronic transfer of funds.

Wire transfers can be done by a simple bank account transfer, or by a

transfer of cash at a cash office. Bank wire transfers are often the

most expedient method for transferring funds between bank accounts.

A bank wire transfer is a message to the receiving bank requesting

them to effect payment in accordance with the instructions given. The

message also includes settlement instructions. The actual wire

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transfer itself is virtually instantaneous, requiring no longer for

transmission than a telephone call.

Controlled Disbursement: This is another product offered by banks

under Cash Management Services. The bank provides a daily report,

typically early in the day, that provides the amount of disbursements

that will be charged to the customer's account. This early knowledge

of daily funds requirement allows the customer to invest any surplus

in intraday investment opportunities, typically money market

investments. This is different from delayed disbursements, where

payments are issued through a remote branch of a bank and customer

is able to delay the payment due to increased float time.

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4.2.3 BILL FOR COLLECTION

1. Background

Inter-Province Cheque Clearing System is the clearing procedure for

cheque, draft, bill of exchange, and promissory note in case that a collecting

branch and a paying branch are located in different clearing areas.

The collecting bank has two alternatives of sending B/C for funds collection

First method:  The collecting bank sends cheques to its branch that is

located within the same clearing house as the paying bank. The cheques

then enter one-day clearing. Once the B/C results are known, the agent

branch then notifies the original branch that called for collection.

Second method:  Generally used when the collecting bank does not have a

branch within the same clearing center as the paying bank, here the

collecting bank sends the cheques through to the paying bank’s headquarter

via ECH, who calculates the net clearing positions for the member banks.

The paying bank notifies its counterparty, the collecting bank, of the B/C

results, and record the information for ECH, who then carries out interbank

settlement via BAHTNET.

Both methods, according to an agreement reached among member banks,

should take no more than 15 working days. With the new BOT regulation

introduced, both methods must take no more than 6 working days. As for

the development to improve system efficiency and achieve one-day

clearing, this depends on the member banks’ readiness with regards to

acquiring the on-line signature authentication technology necessary in order

that bank branches throughout the country would be able to authorize

75

cheques on-line. BOT is in the process of establishing working plans that

are appropriate for the new technologies.

Present, collecting banks can operate the bills for collection in two

ways:               

1. Collection through the provincial clearing house of the paying bank's

area. With this method, a collecting branch transports cheques to another

branch, which is located in the same clearing area as the paying branch. The

collecting branch must complete the clearing process within 5 working days

next to the date of deposit.

2. Collection through the headquarter in Bangkok. A cheque deposited in

Bangkok can be cleared via the clearing system that can complete the

process within 3 working days starting from the date that the physical

cheque is exchanged. Due to its clearing duration, this clearing system is

called "B/C-3D".

  

 2. Regulations, Guidelines, and Policies

The BOT has issued The Bank of Thailand Regulation on Inter – Provincial

Cheque Collection B.E. 2546 as amended in B.E 2548, 2550. The regulation

determined BOT' s authorities and responsibilities for settlement service. In

addition, it determines the  member banks' responsibilities to perform the

process according to The Bank of Thailand Notification on principles,

procedures and time period for settlement.

 

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 3. Participants in the System

There are 2 kinds of members: A direct member refers to a bank that

operates both collecting and paying functions. Moreover, the bank must be

able to operate paying function in all regional areas as determined by BOT.

A direct member can receive collection fees. An indirect member refers to a

bank that operates the collecting function, but does not have branches to

operate the paying function in all regional areas as determined by BOT. An

indirect member will not receive any collection fees.

  

 4. Operational Procedures

A major branch of a collecting bank submits cheques through the clearing

house for its collecting branches and a major branch of a paying bank

verifies the cheque for its account-holding branch.

Normal Round

The headquarter of the collecting bank prepares out-clearing cheque data in

the format complied with the BOT standard and submits the data to the

Electronic Clearing House (ECH) via the Electronic Financial Services

(EFS). ECH then calculates net clearing position and generates in-clearing

data. Physical cheques are sorted by bank and exchanged at the ECH.

Return Round Clearing

Once cheques are exchanged at the ECH, the paying bank verifies those

cheques by validating completeness of the physical cheque, verifying

payer's signature, and debits customer's account in 1-2 days. Returned

77

cheque data and physical cheques must be submitted back to the collecting

bank in 3 working days.

 5. Processing and Equipment

Microcomputers with printers, SMART Card Reader and card reader.

Linkage and transmit message via BOT WEB PORTAL through Electronic

Financial Service (EFS) provided by BOT.

 

 6. Settlement Procedures

The  B/C – 3D clearing position is settled at 1:00 p.m. of  day 3 via

BAHTNET. The position equals to the clearing position in day 1 minus the

position of the returned cheque in day 3. The sending bank credits the

customer’s account after the returned round.

 

 7. Pricing Policy

ECH is a non-profit operation. For processing B/C – 3D transactions, the

sending bank would be changed Baht 0.60 per cheque.

Interbank fees are allocated to collecting and paying banks. However, the

allocation ratio is currently determined as 100:0 for collecting and paying

banks respectively. Thailand Banker Association will revise the appropriate

ratio later.

78

Commercial banks that provide provincial cheque services set fees based on

standard rates of the Thai Bankers' Association, which is 10 baht per each

10,000 baht with the minimum of 10 baht, which is calculated on the face

amount of the cheque.

 

 8. Contingency Plans

BOT has drawn up contingency plans depend on the level of serious

situation of member bank side and Electronic Clearing House side as

follows:

1. In the event that a member bank cannot send the clearing data to the

Electronic Clearing House (ECH) via EFS, a member bank is able to switch

to use other means of communication to send the clearing data.

2. In the event that BOT Web Station of a member bank fails, the member

bank brings the clearing data to ECH in order to send the clearing data via

BOT Web Station at ECH.

3. In the event that the member bank’s system, prepared the clearing data,

fails, use the B/C Stand alone at ECH instead. 

79

CHAPTER 5

FOREX

5.1PEOPLE CONDUCT FOREX TRADE

5.2 HOW IS FOREX TRADING CONDUCTED?

5.3 BENEFITS OF FOREX TRADING

5.4 DETERMINANTS OF FOREX RATES

5.5 ECONOMIC FACTORS

5.6 POLITICAL CONDITIONS

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CHAPTER 5

FOREX

Forex trading [FX trading] involves the buying and selling of currencies of

various different nations. In this type of trade, currencies are exchanged on a

continuous basis in the forex market that covers the globe. People have

several opportunities for profit-making in forex trading when value of one

currency fluctuates against that of another.

Forex trading is quite popular due to several factors like the leverage

available, the high liquidity 24 hours a day and the very low dealing costs.

Evidently many commercial organizations participate in such trades purely

due to the currency exposures created through their import and export

activities, but the major part of the turnover is accounted for by financial

institutions. Investing in foreign exchange remains mainly the domain of the

big professional players in the market, such as funds, banks and brokers.

Nonetheless, any investor having the necessary knowledge of the market's

functions can also benefit from the advantages stated above.

5.1 People conduct Forex Trade to :

1. To Make direct foreign investments

2. Earn profits and make money from short-term fluctuations in the

values of a currency pair

3. Control their existing positions in the market

4. Fulfill their import and export needs

In forex market, there does not exist any centralized exchange, trading is

conducted either through the Electronic Broking System (EBS) or online

81

through the Internet. Online forex trading is very popular among individual

investors. High leverage, flexibility and liquidity are the three main factors

that attract people towardsforex trading.

5.2 How is Forex Trading Conducted?

Similar to other transactions, forex trading involves sellers, buyers, and

intermediaries. While buyers and sellers in this market could be banks,

investment management firms, commercial companies, hedge funds and

retail investors, the intermediaries are the brokers. Forex brokers act as

market makers and place bid and ask prices for a currency pair on behalf of

the buyer or the seller.

Buyers make money by buying a currency at a lower price and selling it

later at a higher price. All transactions by individual traders in case of

theforex market occur through brokers. However, the majority of the forex

trade is conducted between banks.

5.3 Benefits of Forex Trading

1. It is done in an extremely liquid market. Hence, one is unlikely to get

stuck in a trade. He/she can open and close any position according to

his/her desired level.

2. Traders can make profits in both rising and falling markets. One can

take a short position (selling the currency pair and purchasing it back

at a lower price) or long position (purchasing the currency pair and

selling it later at a higher price).

3. Gives traders an option to trade in small lots. This allows a beginner

or a novice trader to begin with small amount of capital and limits the

risks.

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4. Traders don't need to pay commissions to brokers. The transaction

cost is built into the currency price and is known as spread, which is

actually the difference between the buying and selling price at a given

time.

5.4 Determinants of FX rates

See also: exchange rates

The following theories explain the fluctuations in FX rates in a floating

exchange rate regime (In a fixed exchange rate regime, FX rates are decided

by its government):

(a) International parity conditions: Relative Purchasing Power Parity,

interest rate parity, Domestic Fisher effect, International Fisher effect.

Though to some extent the above theories provide logical explanation

for the fluctuations in exchange rates, yet these theories falter as they

are based on challengeable assumptions [e.g., free flow of goods,

services and capital] which seldom hold true in the real world.

(b) Balance of payments model (see exchange rate): This model,

however, focuses largely on tradable goods and services, ignoring the

increasing role of global capital flows. It failed to provide any

explanation for continuous appreciation of dollar during 1980s and

most part of 1990s in face of soaring US current account deficit.

(c) Asset market model (see exchange rate): views currencies as an

important asset class for constructing investment portfolios. Assets

prices are influenced mostly by people’s willingness to hold the

existing quantities of assets, which in turn depends on their

expectations on the future worth of these assets. The asset market

model of exchange rate determination states that “the exchange rate

83

between two currencies represents the price that just balances the

relative supplies of, and demand for, assets denominated in those

currencies.”

5.5 Economic factors

These include: (a)economic policy, disseminated by government agencies

and central banks, (b)economic conditions, generally revealed through

economic reports, and other economic indicators.

Economic policy comprises government fiscal policy

(budget/spending practices) and monetary policy (the means by which

a government's central bank influences the supply and "cost" of

money, which is reflected by the level of interest rates).

Government budget deficits or surpluses: The market usually reacts

negatively to widening government budget deficits, and positively to

narrowing budget deficits. The impact is reflected in the value of a

country's currency.

Balance of trade levels and trends: The trade flow between countries

illustrates the demand for goods and services, which in turn indicates

demand for a country's currency to conduct trade. Surpluses and

deficits in trade of goods and services reflect the competitiveness of a

nation's economy. For example, trade deficits may have a negative

impact on a nation's currency.

Inflation levels and trends: Typically a currency will lose value if

there is a high level of inflation in the country or if inflation levels are

perceived to be rising. This is because inflation erodes purchasing

power, thus demand, for that particular currency. However, a

currency may sometimes strengthen when inflation rises because of

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expectations that the central bank will raise short-term interest rates to

combat rising inflation.

Economic growth and health: Reports such as GDP, employment

levels, retail sales, capacity utilization and others, detail the levels of

a country's economic growth and health. Generally, the more healthy

and robust a country's economy, the better its currency will perform,

and the more demand for it there will be.

Productivity of an economy: Increasing productivity in an economy

should positively influence the value of its currency. Its effects are

more prominent if the increase is in the traded sector [3].

5.6 Political conditions

Internal, regional, and international political conditions and events can have

a profound effect on currency markets.

All exchange rates are susceptible to political instability and anticipations

about the new ruling party. Political upheaval and instability can have a

negative impact on a nation's economy. For example, destabilization of

coalition governments in Pakistan and Thailand can negatively affect the

value of their currencies. Similarly, in a country experiencing financial

difficulties, the rise of a political faction that is perceived to be fiscally

responsible can have the opposite effect. Also, events in one country in a

region may spur positive/negative interest in a neighboring country and, in

the process, affect its currency.

Market psychology

Market psychology and trader perceptions influence the foreign exchange

market in a variety of ways:

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Flights to quality: Unsettling international events can lead to a "flight

to quality," with investors seeking a "safe haven." There will be a

greater demand, thus a higher price, for currencies perceived as

stronger over their relatively weaker counterparts. The U.S. dollar,

Swiss franc and gold have been traditional safe havens during times

of political or economic uncertainty.[14]

Long-term trends: Currency markets often move in visible long-term

trends. Although currencies do not have an annual growing season

like physical commodities, business cycles do make themselves felt.

Cycle analysis looks at longer-term price trends that may rise from

economic or political trends.[15]

"Buy the rumor, sell the fact": This market truism can apply to many

currency situations. It is the tendency for the price of a currency to

reflect the impact of a particular action before it occurs and, when the

anticipated event comes to pass, react in exactly the opposite

direction. This may also be referred to as a market being "oversold"

or "overbought".[16] To buy the rumor or sell the fact can also be an

example of the cognitive bias known as anchoring, when investors

focus too much on the relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect

economic policy, some reports and numbers take on a talisman-like

effect: the number itself becomes important to market psychology and

may have an immediate impact on short-term market moves. In recent

years, for example, money supply, employment, trade balance figures

and inflation numbers have all taken turns in the spotlight.

Technical trading considerations: As in other markets, the

accumulated price movements in a currency pair such as EUR/USD

can form apparent patterns that traders may attempt to use.

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CHAPTER 6

BANKING CHANNELS

Alternative Banking Channels

Business Internet Banking

Balance and Transaction Reporting

All deposit accounts you designate will be accessible through Business

Internet Banking. Get detailed information on your accounts and view your

latest account balances and transaction history.

Transfers

Transfer funds between your company's accounts within HSBC Philippines,

or just as easily to third party accounts in other local banks and abroad. You

can also request a cashier's order or demand draft, issue standing

instructions for regular transfers to other accounts within HSBC Philippines,

and create transfer templates to easily repeat transaction instructions with

minimal changes.

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Inquiries

Get indicative foreign exchange rates and time deposit rates.

Mail Options

Send and receive messages to and from HSBC using the secure mail option.

It's your constant direct line to the world's local bank.

Pay Bills

Pay local bills to various service providers. Funds will be remitted to the

service provider on the next working day of the payment instructions. Please

note this function is not available to delegates with an access level of

"Inquiry only". Speak to the Commercial Banking Relationship

Team about access level status on (02) 85-878 for local calls and +(63) (2)

85-87800 for international calls.

New Features

Our Internet Banking site has been revamped to provide you with a superior

online banking experience. The new layout and design makes it easier for

you to navigate through the products and services. New features include an

Autopay function to make bulk payments to other accounts in HSBC, as

well as improved security functionality to ensure high value transactions

require authorization from two pre-authorized users before completion.

Security

Business Internet Banking uses what may be considered the latest and most

secure technology available. A 128-bit encryption code protects all bank

transfers and on-line bank instructions. While all delegates will be provided

with their Business Internet Banking Username, they can choose their

individual Personal Internet Banking Password (6-8 characters).

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CHAPTER 7

NATIONAL ELECTRONIC FUND TRANSFER

&

REAL TIME GROSS SETTLEMENT

SERVICES

The NEFT (National Electronic Fund Transfer) Service helps in the

seamless transfer of funds from one branch to another without any delays or

procedural hassles. Like RTGS, RBI has introduced another type of funds

transfer system called NEFT (National Electronic Funds Transfer). The

operations and functions of the system are similar to RTGS. We have

become active member of NEFT system and we propose to introduce a new

product called TMB e-Transfer (NEFT).

This facility can be availed only by account holders of our bank since both

the beneficiary as well as applicant account number (TMB account number)

should be compulsorily mentioned in the NEFT application form.

In RTGS, Settlement will take place continuously between 9.00 A.M and

2.00 P.M and the return time allowed is up to two hours from the time of the

receipt of the payment. However, in NEFT, there are four clearing

settlement batches (9.30,10.30,12.00, & 4.00) and the return time allowed is

24 hours. The messages received by RBI within each settlement batch time

will be consolidated and distributed to payee's banks after settlement.

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Normally, payment message reaches receiving (payee's) bank within 15 to

30 minutes from the batch time. For e.g. message sent to RBI for the 12.00

clock settlement batch, will reach receiving bank by 12.30 P.M. If the

receiving bank has STP (Straight Through process) facility, the amount will

be credited immediately, or otherwise, the amount may be credited within

the end of the day. However, if the receiving bank wants to return the

message, they should return within 12.00 Noon batch of next settlement day

(Within 24 hours).

RBI has introduced NEFT system mainly to send small value payments at

nominal cost. We can send funds from our bank to other bank-branches,

which have IFS Code, and joined in NEFT network. So far, 42 banks have

joined in this system and more than 10000 of their branches are under this

network. More bank-branches are expected to join in the days to come.

In order to encourage small value payments through NEFT, we have fixed

nominal charges only. Commission for Outward Payment is Rs. 5/- flat for

amounts less than Rs. 1,00,000.00 and Rs. 25/- flat for transactions for Rs.

1,00,000.00. There is no minimum transfer amount limit. However, only

upto Rs. 1,00,000.00 can be transferred per transaction. There is no inward

payment charges under NEFT.

Our customers are adviced to instruct their counterpart to quote correctly the

full 15-digit account number for inward payment to identify the branch and

credit their account immediately. If the message received is without 15-digit

account number it will be rejected and returned automatically.

NEFT is the most suitable mode of payment for small value payments as the

charges are cheaper and settlements are faster when compared with other

modes of payment

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REAL TIME GROSS SETTLEMENT

Learn more about the latest technology oriented service being provided by

our TMB viz. RTGS. TMB was one of the earliest adopters of RTGS

facility in India and currently all our branches are RTGS enabled. Under this

system funds can be transferred between two RTGS enabled bank branches

irrespective of the bank and the location of the branch.

Reach your beneficiaries within 2 hours:

Every branch of our bank has a distinctive RTGS Code and the same can be

seen in the branch network under the details for every branch.

Tamilnadu Mercantile Bank Ltd., implemented its ANY BANK / BRANCH

Money Transfer facility to its customers under RTGS mode on 14.01.2005.

Through this facility one can receive payment from any other banks'

branches who are RTGS members having IFS code or make payment to any

other banks' branches who are RTGS members having IFS code located

across the country within two hours at cheaper cost and at the same time

with high safety.

In India, 115 Banks have started RTGS transactions with more than 25000

branches. On 14.01.2005, TMB started this facility with 45 of its branches.

The scheme has been receiving good response from the public and the

number of transactions through RTGS is on the increasing trend. So TMB

decided to have 100% RTGS status for customer transactions and to enable

all its 217 branches under RTGS from 8th July 2005. TMB is the First

Bank in Tamilnadu and 3rd in India to achieve 100% RTGS Status

throughout India at all its branches without exception. It is possible because,

TMB has already networked all its 217 branches, all the 7 Regional Offices,

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Extension Counters and Head Office under the 'Finacle' platform provided

by the renowned software major 'Infosys'.

Through RTGS one can send / receive payments across the country to / from

any bank / any branch provided sending bank as well as receiving bank are

members of RTGS and their branches are RTGS enabled with IFSC Code.

RTGS facilitates quick fund transfer and settlements among the banks for

inter bank and customer transactions. It reduces the settlement risk, as

payments are made online basis. This system is very much useful not only

among banks but also for customers as payment / receipt is made on the

same day on real time basis and without any risk, i.e., within two hours at

cheaper cost.

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CHAPTER 8

THE PRINCIPLES

The system should have a well-founded legal basis under all relevant

jurisdictions.

The system's rules and procedures should enable participants to have

a clear understanding of the system’s impact on each of the financial

risks they incur through participation in it.

The system should have clearly defined procedures for the

management of credit risks and liquidity risks, which specify the

respective responsibilities of the system operator and the participants

and which provide appropriate incentives to manage and contain

those risks.

The system should provide prompt final settlement on the day of

value, preferably during the day and at a minimum at the end of the

day. (Systems should seek to exceed the minima included in this Core

Principle.)

A system in which multilateral netting takes place should, at a

minimum, be capable of ensuring the timely completion of daily

settlements in the event of an inability to settle by the participant with

the largest single settlement obligation. (Systems should seek to

exceed the minima included in this Core Principle.)

Assets used for settlement should preferably be a claim on the central

bank; where other assets are used, they should carry little or no credit

risk and little or no liquidity risk.

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QUESTIONAIRE

How much foreign exchange is available for a business trip?

Authorised dealers can release foreign exchange up to US$25,000 for a

business trip to any country other than Nepal and Bhutan. Release of foreign

exchange exceeding US$25,000 for travel abroad (other than Nepal and

Bhutan) for business purposes, irrespective of period of stay, requires prior

permission from Reserve Bank. Visits in connection with attending of an

international conference, seminar, specialised training, study tour,

apprentice training, etc., are treated as business visits.

Can residents obtain foreign exchange for medical treatment outside

India?

For medical treatment abroad exchange can be released upto USD 100,000/-

based on a simple declaration from the customer in addition to submission

of an application form and Form A2 as per the recent liberalisation policy of

The Reserve Bank of India.

How much exchange is available for studies outside India?

Release of Foreign exchange for studies abroad has now been increased to

USD 100,000/- based on a simple declaration from the customer in addition

to submission of an application form and Form A2 as per the recent

liberalisation policy of The Reserve Bank of India.

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How much foreign exchange can one buy when going for tourism to a

country outside India?

In connection with private visits abroad, viz., for tourism purposes, etc.,

foreign exchange up to US$10,000, in any one calendar year may be

obtained from an authorised dealer. The ceiling of US$10,000 is applicable

in aggregate and foreign exchange may be obtained for one or more than

one visits provided the aggregate foreign exchange availed of in one

calendar year does not exceed the prescribed ceiling of US$10,000 {The

facility was earlier called B.T.Q or F.T.S.}. This US$10,000 (BTQ) can be

availed of by a person alongwith foreign exchange for travel abroad for any

purpose, including for employment or immigration or studies. However, no

foreign exchange is available for visit to Nepal and/or Bhutan for any

purpose. The same can be obtained based on a simple declaration from the

customer in addition to submission of an application form and Form A2 as

per the recent liberalisation policy of the Reserve Bank of India.

How much foreign exchange is available to a person going abroad on

employment?

Person going abroad for employment can draw Foreign Exchange upto USD

100,000/- based on a simple declaration from the customer in addition to

submission of an application form and Form A2 as per the recent

liberalisation policy of The Reserve Bank of India.

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How much foreign exchange is available to a person going abroad on

immigration?

Persons going abroad for immigration can draw foreign exchange upto USD

100,000/- based on a simple declaration from the customer in addition to

submission of an application form and Form A2 as per the recent

liberalisation policy of The Reserve Bank of India.

Is there any purpose for which going abroad requires prior approval

from the Reserve Bank or Govt. of India?

Dance troupes, artistes, etc., who wish to undertake cultural tours abroad,

should obtain prior approval from the Ministry of Human Resources

Development, Government of India, New Delhi.

From where one can buy foreign exchange?

Foreign exchange can be purchased from most branches of HDFC Bank.

The Foreign Exchange can be taken as Currency notes and Traveller's

Cheques besides Foreign Currency DDs and Telegraphic Transfers

depending on the purpose of travel.

How much foreign exchange can be purchased in foreign currency

notes while buying exchange for travel abroad?

Travellers are allowed to purchase foreign currency notes/coins only up to

US$ 3000. Balance amount can be taken in the form of Traveller's Cheque,

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banker's draft or Forexplus card. Exceptions to this are (a) travellers

proceeding to Iraq and Libya can draw foreign exchange in the form of

foreign currency notes and coins not exceeding US$ 5000 or its equivalent;

(b) travellers proceeding to the Islamic Republic of Iran, Russian Federation

and other Republics of Commonwealth of Independent States can draw

entire foreign exchange released in form of foreign currency notes or coins.

How much in advance one can buy foreign exchange for travel abroad?

The foreign exchange acquired for any purpose has to be used within 60

days of purchase. In case it is not possible to use the foreign exchange

within the period of 60 days it should be surrendered to an authorised

dealer.

How much foreign exchange can one send as gift / donation to a person

resident outside India?

Any person resident in India under the liberalised remittance scheme can

remit upto US$ 200,000 in an finanacial year as a gift to a person residing

outside India or as donation to a charitable / educational / religious / cultural

organisation outside India. This remittance can be done only under the

liberalised remittance scheme and is meant for individual only

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While coming into India how much foreign exchange can be brought in

by NRIs?

An NRI coming into India from abroad can bring with him foreign

exchange without any limit provided if foreign currency notes, travellers

cheques, Forexplus Card exceed US$ 10,000/- or its equivalent and/or the

value of foreign currency exceeds US$ 5,000/- or its equivalent, it should be

declared to the Customs Authorities at the Airport in the Currency

Declaration Form (CDF), on arrival in India.

Can a Resident Indian maintain Foreign currency accounts in India?

A resident Indian can maintain a Foreign Currency (Domestic) Account and

deposit Foreign Exchange acquired from any of the sources approved by

Reserve bank of India e.g. . Unspent BTQ, honorarium or gift / payment for

services while on a visit outside India or received from a person not resident

in India or who is on visit to India in settlement of a lawful obligation etc.

Can a Non HDFC Bank customer avail of Foreign Exchange Services

for purpose of Travel or make remittances overseas?

Yes, a Non HDFC Bank Customer can take foreign exchange for any branch

dealing in foreign exchange. You can avail of Foreign Exchange against

paying Cash, Cheque or Pay Order / Demand Draft. The Cash will be

accepted upto Rs. 50,000/- (as per Indian Tax Laws) and any amount above

Rs. 50,000/- will against Pay Order or Cheque after clearance of the same.

You will have to carry required Documentary Proof for issuance of Foreign

Exchange.

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CONCLUSION

Payment systems are the backbone of the financial infrastructure of the

nation, enhance globalization and act as tools of economic empowerment by

financial inclusion. There is a need to create payment systems that are

efficient, reliable, affordable and of global standards.

Proliferation of modern payment systems have far reaching economic and

social implications for India where significant population have so far been

excluded from the benefits of the financial system. Efficient payment

systems help in financial inclusion. Implementation of such systems

increase transparency, lower transaction costs, improves operational

efficiency of trade and commerce and provides support to globalization of

economy.

I record my appreciation for Bank net India who is organizing such highly

focused banking conferences and workshops. I am sure, this initiative on the

part of Bank net India will provide a platform for knowledge sharing and

networking for the professionals from banking industry.

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BIBLIOGRAPHY

WIKIPEDIA.COM

NIIT

GOOGLE.COM

UNION BANK OF INDIA

MASTERCARD.COM

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