Indian Banking Services
†††††
Jitendra K. Gajera (M.A., M.Phil) & Dinesh R. Chavda (M.Com, M.Phil, G-slet)
II
ARTICLE BY
Jitendra K. Gajera & Dinesh R. Chavda
© Kinjal J. Gajera First edition: 2013 Prize: 125 Copy: 500 Type & Setting: Dinesh R. Chavda At. - Kerala, Ta-Dist Junagadh Pin: 362310
ISBN: 978-81-925441-5-1
Publisor: Jitendra K. Gajera, At. - Makhiyala, Ta - Dist Junagadh Pin: 362014 Printed by: Vaibhav Printing Press – Makhiyala
III
Dedication
“Supreme sacred respected father and my mother stages”
IV
PREFACE
Banks are regarded as the blood of the nation’s economy without them one cannot imagine economy moving. Therefore banks should be operated very efficiently, public sector banks although a big part of whole banking system in India, but they are very important not only from economical point of view but also social point of view as it is more concerned about common people’s welfare and development. Banking is one of the most important of economy. Indian banking system over past few decades has played a very effective role in mobilization of savings of the economy spreading in banking habit to the furthest corner of the country and enlarged entrepreneurial base. Indian banks have multiplied their activities in volume variety and geographical coverage to meet the growing needs of society, the old methods and techniques of viability growth based formation of finance schemes of marketing. Instead of working for profits, they are required to participate in the nation building activities and help in bringing socio-economic change. I am sure that this work will prove useful all those interested in the subject, particularly researchers, manager, Professionals, Practitioners and policy makers. I wish all success and congratulation to the author.
V
INDIAN BANKING SERVICES
INDEX
SR. CHAPTER NAME PAGE NO NO 1 History of banking 1 2 Function of bank of India 21 3 Retail banking services – I 37 4 Retail banking services –II 74 5 Channels of banking sector in 107 India – I 6 Channels of banking sector in 128 India – II Bibliography
VI
CHAPTER 1
HISTORY OF BANKING
1.1 INTRODUCTION 1.2 NEED OF THE BANKS 1.3 ORIGIN OF THE WORD “BANK” 1.4 MEANING OF BANK 1.5 DEFINITIONS OF BANK 1.6 HISTORY OF BANKING IN INDIA 1.7 BANKING AFTER INDEPENDENCE IN INDIA 1.8 REFORMS IN BANKING SECTOR IN INDIA
VII
1.1 INTRODUCTION A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry.
A banking system also referred as a system provided by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, through-out the day. The banking system in India should not only be hassle free but it should be able to meet the new challenges posed by the technology and any other external and internal factors. For the past three decades, India’s banking system has several outstanding achievements to its credit. The Banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguards the money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashier’s cheques. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role—accepting deposits and lending funds from these deposits.
"With the monetary system we have now, the careful saving of a lifetime Can be wiped out in an eye blink”
Larry Parks, Executive Director, FAME
VIII
Could you imagine a world without banks? At first, this might sound like a great thought! But banks (and financial institutions) have become cornerstones of our economy for several reasons. They transfer risk, provide liquidity, facilitate both major and minor transactions and provide financial information for both individuals and businesses.
“Thank God, In Joy and Sorrow, to deposit and borrow, Banks are there Otherwise, the question would be funny, to keep and get money How and Where”
These words indicate the importance of bank. Banking system plays an important role in growth of economy. The banking sector is the lifeline of any modern economy. It is one of the important pillars of financial system, which plays a vital role in the success or failure of an economy. It is a well known fact that banks are one of the oldest financial intermediaries in the financial system. They play a crucial role in the mobilization of deposits from the disbursement of credit to various sectors of the economy. The banking system reflects the economic health of the country. The strength of the economy of any country basically hinges on the strength and efficiency of its financial system, which in turn depends on a sound and solvent banking system. A Banking Sector performs three primary functions in economy, the operation of the payment system, the mobilization of savings and the allocation of saving to investment products.
Banking industry has been changed after reforms process. The Government has taken this sector in a basic priority and this service sector has been changed according to the need of present days. Banking sector reforms in India Strive to increase efficiency and profitability of the banking institutions as well as brought the existing banking institutions face to face with global competition in globalization process. Different type of banks differs from each other in terms of operations, efficiency, productivity, profitability
IX and credit efficiency. Indian banking sector is an important constituent of the Indian Financial System. The banking sector plays a vital role through promoting business in urban as well as rural area in recent year, without a sound and effective banking system, India cannot be considered as a healthy economy.
1.2 NEED OF THE BANKS
Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Again there were no security of public savings and no uniformity regarding loans. So as to overcome such problems the organized banking sector was established, which was fully regulated by the government. The organized banking sector works within the financial system to provide loans, accept deposits and provide other services to their customers. The following functions of the bank explain the need of the bank and its importance:
1. To provide the security to the savings of customers. 2. To control the supply of money and credit 3. To encourage public confidence in the working of the financial system, increase savings speedily and efficiently. 4. To avoid focus of financial powers in the hands of a few individuals and institutions. 5. To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of customers.
1.3 ORIGIN OF THE WORD “BANK”
There seems no uniformity amongst the economist about the origin of the word “Bank “According to some authors the word “Bank”, itself is derived from the word “Bancus” or “Banque” that is a bench. The early bankers, the Jews in Lombardy, transacted their business on benches in the market
X place, when, a Banker failed, his ‘Banco’ was broken up by the people; it was called ‘Bankrupt’. This etymology is however, ridiculed by McLeod on the ground that “The Italian Money changers as such were never called Bunchier in the middle ages.”
It is generally said that the word "BANK" has been originated in Italy. In the middle of 12th century there was a great financial crisis in Italy due to war. To meet the war expenses, the government of that period a forced subscribed loan on citizens of the country at the interest of 5% per annum. Such loans were known as 'Compare', 'minto' etc. The most common name was "Monte'. In Germany the word 'Monte was named as 'Bank' or 'Banke'. According to some writers, the word 'Bank' has been derived from the word bank.
It is also said that the word 'bank' has been derived from the word 'Banco' which means a bench. The Jews money lenders in Italy used to transact their business sitting on benches at different market places. When any of them used to fail to meet his obligations, his 'Banco' or banch or bench would be broken by the angry creditors. The word 'Bankrupt' seems to be originated from broken Banco. Since, the banking system has been originated from money leading business; it is rightly argued that the word 'Bank' has been originated from the word "Banco'. Whatever be the origin of the word ‘Bank’ as Professor Ram Chandra Rao says, “It would trace the history of banking in Europe from the middle Ages.
Today the word bank is used as a comprehensive term for a number of institutions carrying on certain kinds of financial business. In practice, the word ‘Bank' means which borrows money from one class of people and again lends money to another class of people for interest or profit.
Actually meaning of bank is not specifies in any regulation or act. In India, different people have different type of meaning
XI for bank. Normal salary earner knows means of bank that it is a saving institution, for current account holder or businessman knows bank as a financial institutions and many other. Bank is not for profit making, it creates saving activity in salary earner.
1.4 MEANING OF BANK
A Bank is an institution which accepts deposits from the general public and extends loans to the households, the firms and the government. Banks are those institutions which operate in money. Thus, they are money traders, with the process of development functions of banks are also increasing and diversifying now, the banks are not nearly the traders of money, they also create credit. Their activities are increasing and diversifying. Hence it is very difficult to give a universally acceptable definition of bank.
1.5 DEFINITIONS OF BANK
Indian Banking Regulation act 1949 section 5 (1) (b) of the banking Regulation Act 1949 Banking is defined as.
“Accepting for the purpose of the landing of investment of deposits of money from public repayable on demand or other wise and withdraw able by cheques, draft, order or otherwise.”
“Bank means a bench or table for changing money.” - Greek History
“Bank is an establishment for custody of money received from or on Behalf of its customers. Its essential duty is to pay their drafts unit. Its profits arise from the use of the money left employed them.” -Oxford Dictionary
XII
“Bank is an institution which traders in money, establishment for money, as also for making loans and discounts and facilitating the transmission of remittances from one place to another.” -Western’s Dictionary
“Bank means the place when money is kept safely, open an account with any bank and make transaction with that bank is simply called as bank” - Dictionary
“A bank is an establishment which makes to individuals such advances of money or other means of payment as may be required and safely made and to which individuals entrust money or means of payment when not required by them for use. ” - Pro. Kinely
“Bank as institutions which collects money from those who it to spare or who are saving it out of their income and lends out to those who required it” - Prof. Crothers
“A banker is defined as a person who carries on the business of banking, which is specified as conducting current accounts for his customers, paying cheques drawn on him, and collecting cheques for his customers.” - English common law
“A Bankers is one who is the ordinary course of his business honours drawn upon him by person from and for whom he receives money on current account”
XIII
1.6 HISTORY OF BANKING IN INDIA
HISTORY OF BANKING IN INDIA
ANCIENT INDIA MUGHALPERIOD BRITISH PERIOD
A. ANCIENT INDIA
The origin of banking in dates back to the Vedic period. There are repeated References in the Vedic literature to money lending which was quite common as a side business. Later, during the time of the Smites, which followed the Vedic Period and the Epic age, banking become a full-time business and got diversified with bankers performing most of the functions of the present day. The Vaish community, who conducted banking business during this period. As far back as the second or third century A.D. Manu the great Hindu Jurist, devoted a section of his work to deposits and advances and laid down rules relating to rates of interest to be charged. Still later, that is during the Buddhist period, banking business was decentralized and become a matter of volition. Consequently, Brahmins and Kshatriyas, who were earlier not permitted to take to banking as their profession except under exceptionally rare circumstances, also took to it as their business. During this period banking became more specific and systematic and bills of exchange came in wide use. “Shresthis” or bankers influential in society and very often acted as royal treasurers. From the ancient times in India, an indigenous banking system has prevailed. The businessmen called Shroffs, Seths, Sahukars, Mahajans, and Chettis etc. had been carrying on the business of banking since ancient times. These indigenous bankers included
XIV very small money lenders to shroffs with huge businesses, who carried on the large and specialized business even greater than the business.
B. MUGHAL PERIOD
Mughal dynasty started with Babur ascending the throne of Agra in 1526 A.D. During Mughal period the indigenous bankers played a very important role in lending money and financing of foreign trade and commerce. They were also engaged in the profitable business of money changing. Banking business was, however particularly during the secular and settled reign of Emperor Akbar was gave the much needed political stability to the country. Every city, big or small had a ‘Sheth’ also known as a ‘Shah’ or ‘Shroff’, who performed a number of banking functions. He was respected by all parts of people as an important citizen. In Principal cities, besides shroffs, there was a ‘Nagar Sheth’ or ‘Town Banker’. They were instrumental in changing funds from place to place and doing collection business mainly through Hundis. The Hundis were accepted mode of change of money for commercial transactions.
C. BRITISH PERIOD
The seventeenth century witnessed the coming into India of the English traders. The English traders established their own agency houses at the port towns of Bombay, Calcutta and Madras. These agency houses, apart from engaging in trade and commerce, also carried on the banking business. The development of the means of transport and communication causing deflection of trade and commerce along new routes, changing the nature of trade activities in the country were the other factor which also contributed to the downfall of the indigenous bankers. Partly to fill the void caused by their downfall and partly to finance the growing financial requirements of English trade. The East India Company now came to favour the establishment of the banking institutions patterned after the Western style.
XV
The first Joint Stock Bank established in the country was the Bank of Hindustan founded in 1770 by the famous English agency house of M/s. Alexander and Company. The Bengal Bank and The Central Bank of India were established in 1785. The Bank of Bengal, the first of the three Presidency Banks was established in Calcutta in 1806 under the name of bank of Calcutta. It was renamed in 1809 on the grant of the charter as a Bank of Bengal. The two other presidency banks, namely the bank of Bombay and the Bank of Madras, were established in 1840 and 1843 respectively. After the Paper Currency Act of 1862, however the right of the note issue was taken away from them. The Presidency Banks had branches in important towns of the country. The banking crisis of 1913 to 1917 however brought out the serious deficiencies in the existing banking system in the country showing the need for effective co-ordination through the establishment of the Central Bank. After repeated efforts, the three presidency bank was fused into a single bank under the name of the Imperial Bank of India in1921.
The bank was authorized to hold Government balances and manage public debt. It was not, however, given power to issue notes. The issuing of the currency continued to be close preserving of the Government of India. The branches of the bank were to work as clearing houses. It was mainly a commercial bank competing with other banks. The Imperial Bank of India was nationalized in 1955 by the SBI act.
In the wake of the Swadeshi Movement, a number of banks with Indian Management were established in the country. The Punjab National Bank Ltd. Was founded in 1895, The Bank of India Ltd in 1906, The Canara Bank Ltd. In 1906,The Indian Bank Ltd. in 1907, the Bank of Baroda Ltd. in 1908, and the Central Bank of India Ltd. in 1911.
There have been a number of checks to progress to the Banking Industry in the form of bank failures during the last over 100 years. The series of bank crisis particularly during the time
XVI
1913–17, 1939–45 and 1948–53 wiped out many weak units. Loss in trade or industry affected their credit and solvency. It may however, be stated that one of the important reasons for the last banking crisis of 1948–53 was the partition of the country into India and Pakistan. Most of the depositors who were Hindus migrated from Pakistan to India while a major portion of the assets of the banks, which failed remained in Pakistan.
Although, Suggestions have been made from time to time that India ought to have a Central Bank. The Royal Commission on Indian currency and finance recommended that a Central Bank should be started in India so as to perfect her credit and currency organization. From 1927 to 1933, there was a proposal and constitutional reforms law process has been made. It was enacted in due course and became law on the 6th march 1934 and the Reserve Bank of India started functioning with effect from 1st April 1935. Banking regulation act was passed in 1949.
1.7 BANKING AFTER INDEPENDENCE IN INDIA
BANKING AFTER INDEPENDENCE IN INDIA
FIRST PHASE SECOND PHASE THIRD PHASE 1948-1969 1969-1990 1991-2002
The country inherited a banking system that was patterned on the British Banking System. There were many joint stock companies doing banking business and they were concentrating mostly in major cities. It is interesting to study the evolution of Indian Banking over the Last five decades, in terms of organization, functions, resource mobilization, Socio-economic
XVII role, problems and solutions. The period of five decades witnessed many macro-economic developments, monetary and banking policies and the external situation, which influenced the evolution of Indian banking in different ways and in different periods. For this reason, it would be useful to analyze in some detail the evolution of Indian banking with reference to some distinct phases. The first phase covers the period from 1948 to 1968 and the second phase from 1969 to 1991. These two periods constitute the past. The period of banking reforms beginning with 1992 and till the year 2002 may be regarded as the present or the current phase for the purpose of this analysis. It is the current phase, which provides the basis for looking into the future of Indian banking system .
A. FIRST PHASE: 1948 – 1969
The country inherited a banking system that was patterned on the British Banking System. There were many joint stock companies doing banking business and they were concentrating mostly in major cities. Even the financing activities of these banks were confined to the exports of Jute, Tea etc and traditional industries like textile and sugar. There was no uniform law governing banking activity. An immediate concern after the partition of the country was about bank branches located in Pakistan and steps were taken to close some of them as desire by that country. In 1949, as many as 55 banks either went into liquidation or went out of banking business. Banking did not receive much attention of the policy makers and disjointed efforts were made towards the regulation of the banking industry.
B. SECOND PHASE: NATIONALIZATION ERA 1969 – 1990
After independence, India adopted a socialist pattern of society as its goal. This means in non technical language a society with wealth distributed as equitably as possible without making the country a totalitarian state. In 1955, the Imperial Bank of India
XVIII was nationalized and its undertaking was taken over by State Bank of India. Its transformation into SBI has been effective from July 1, 1955.
There were 7 subsidiaries Banks. Their Associate Bank was 5960. The State Bank group including State Bank of Hyderabad, State Bank of Mysore, State Bank of Travancore, State Bank of Bikaner and Jaipur, State Bank of Indore, State Bank of Patiala and State Bank of Saurashtra. As regards the scheduled banks, there were complaints that Indian Commercial.
Banks were directing their advances to the large and medium scale industries and big business houses and that the sectors demanding priority such as agriculture, small scale industries and exports were not receiving their due share. This was one of the chief reasons for imposition of social control by amending the banking regulation act, with effect from 1 st February 1969. On 19th July 1969, 14 major banks were nationalized and taken over they were as under:
1. The Central Bank of India Ltd. 2. The Bank of India Ltd. 3. The Punjab National Bank Ltd. 4. The Bank of Baroda Ltd. 5. The United Commercial Bank Ltd. 6. The Canara Bank Ltd. 7. The United Bank of India Ltd. 8. The Dena Bank Ltd. 9. Syndicate Bank Ltd. 10. The Union Bank of India Ltd. 11. The Allahabad Bank Ltd. 12. The Indian Bank Ltd. 13. The Bank of Maharashtra Ltd.
XIX
14. The Indian Overseas Bank Ltd. Each bank was having deposits of more than Rs. 50 crore and having among Themselves aggregate deposits of Rs. 2632 crore with 4130 branches. On 15 th April 1980, six more banks were nationalized. These banks were:
1. The Andhra Bank Ltd. 2. The Corporation Bank Ltd. 3. The New Bank of India Ltd. 4. The Oriental Bank of Commerce Ltd. 5. The Punjab & Sind Bank Ltd. 6. The Vijya Bank Ltd.
There were some effects and achievements of nationalized banks. However, there are some problems relating to NPAs, competition, competency, overstaffing, inefficiency etc. for the nationalized bank.
BRANCH EXPANSION SINCE 1969 TO 1991
Year Total No. of Rural Branches Semi-urban Branches Branches 1969 8262 1833 3342
1980 32419 15105 8122
1991 60,220 35206 11,344
(Source: RBI (1998): Banking Statistics, 1992.95) It can be seen from the Table that the total number of bank branches increased eight-fold between 1969 to 1991. The bulk of the increase was on account of rural branches which increased from less than 2000 to over 35000 during the period. The percentage share of the rural and semi-urban branches rose from 22 and 4 respectively in 1969 to 45 percent and 25 per cent in
XX
1980 and 58 per cent and 18 per cent in 1991. The impact of this phenomenal growth was to bring down the population per branch from 60,000 in 1969 to about 14,000. The banking system thus assumed a broad mass-base and emerged as an important instrument of social-economic changes. However, this success was neither unqualified nor without costs. While the rapid branch expansion, wider geographical coverage has been achieved, lines of supervision and control had been stretched beyond the optimum level and had weakened. Moreover, retail lending to more risk- prone areas at concessional interest rates had raised costs, affected the quality of assets of banks and put their profitability under strain.
C. THIRD PHASE: 1991 – 2002 ECONOMIC REFORMS
The Indian economic development takes place in the realistic world from 1991 “Liberalization, Privatization and Globalization” policy. As per “LPG” policy all restriction on the Indian economy was totally dissolved and the soundest phase for the Indian banking system adopt over here. This also changed the scenario of the macro-economic world. The budget policy and suggestion provided by shri Dr Man Mohan Singh and the Governor of Reserve Bank of India. As per the guideline the segments for development is having various problem and so the importance of public sector cannot be ignored. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money the financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.
XXI
1.8 REFORMS IN BANKING SECTOR IN INDIA
Banking Sector reforms were initiated to upgrade the operating standard health and financial soundness of the banks. The Government of India setup the Narasimham Committee in 1991, to examine all aspects relating to structure, organization and functioning of the Indian banking system the recommendations of the committee aimed at creating at competitive and efficient banking system. Another committee which is Khan Committee was instituted by RBI in December, 1997 to examine the harmonization of the role and operations of development financial institutions and banks. It submitted its report in 1998.The major commendations were a gradual more towards universal banking, exploring the possibility of gain full merger as between banks, banks and financial institutions. Then the Verma Committee was established this committee recommended the need for greater use of IT even in the weak public sector banks, restructuring of weak banks but not merging them with strong banks, VRS for at least 25% of the staff. The Banking Sector reforms aimed at improving the policy frame work, financial health and institutional infrastructure, there two phase of the banking reforms. Narasimham Committee provided the blue print for the initial reforms in banking sector following the balance of payment crisis in 1991.
NARASIMHAM COMMITTEE
FIRST PHASE (1991) SECOND PHASE (1998)
XXII
Phase I: Narasimham Committee (1991)
Deregulation of the interest rate structure. Progressive reduction in pre-emptive reserves. Liberalization of the branch expansion policy. Introduction of prudential norms. Decline the emphasis laid on directed credit and phasing out the confessional rate of interest to priority sector. Deregulation of the entry norms for private sector banks and foreign banks. Permitting public and private sector banks to access the capital market. Setting up to asset reconstruction fund. Constituting the special debt recovery tribunals. Freedom to appoint chief executive and officers of the banks. Changes in the institutions of the board. Bringing NBFC, under the ambit of regulatory framework.
PHASE II: NARASIMHAM COMMITTEE II(April 1998)
(I) CAPITAL ADEQUACY:
Minimum capital to risk asset ratio be increased from the existing 8 percent to 10 percent by 2002. 100 percent of fixed income portfolio marked to market by 2001. 5 percent market risk weight for fixed income securities and open foreign exchange position limits. Commercial risk weight (100%) to government guaranteed.
XXIII
The Committee suggests that pending the emergence of markets in India where market risks can be covered, it would be desirable that capital adequacy requirements take into account market risks in addition to the credit risks. In the next three years, the entire portfolio of Government securities should be marked to market and this schedule of adjustment should be announced at the earliest. It would be appropriate that there should be a 5% weight for market risk for Govt. and approved securities.
(II) ASSET QUALITY
Banks should aim to reduce gross NPAs to 3% and net NPA to zero percent by 2002. Directed credit obligations to be decline from 40 percent to 10 percent. Government guaranteed irregular accounts to be classified as NPAs and provide for. 90 day overdue norms to be applied for cash based income recognition. Introduction of the norm of 90 days for income recognition in a phased manner. Banks should also pay greater attention to asset liability management to avoid mismatches and to cover, among others, liquidity and interest rate risks. Banks should be encouraged to adopt statistical risk.
(III) SYSTEMS AND METHODS
Banks to start recruitment from market. Overstaffing to be dealt with by redeployment and right sizing via VRS. Public sector banks to be given flexibility in remuneration structure. Introduce a new technology.
XXIV
These should form the basic objective of internal control systems, the major components of which are: (1) Internal Inspection and Audit, including concurrent audit, (2) Submission of Control Returns by branches/controlling offices to higher level offices (3) Visits by controlling officials to the field level offices (4) Risk management systems (5) Simplification of documentation, procedure and of inters office communication channels.
(IV) INDUSTRY STRUCTURE
Only two categories of financial sector players to emerge. Banks and non Bank finance companies. Mergers to be driven by market and business considerations. Feeble banks should be converted into narrow banks. Entry of new private sector banks and foreign banks to continue. Banks to be given greater functional autonomy & minimum government Shareholding 33 percent for State Bank of India, 51 percent for other Public Sector Banks.
(V) REGULATION AND SUPERVISION
Board for financial regulation and supervision to be constituted with statutory Powers. Greater emphasis on public disclosure as opposed to disclosure to regulators. Banking regulation and supervision to be progressively de linked from monetary policy .
(VI) LEGAL AMENDMENTS
XXV
Broad range of legal reforms to facilitate recovery of problem loans. Introduction of laws governing electronic fund transfer. Many of the important recommendations of Narasimham Committee II have been accepted and are under implementation the second generation banking reforms concentrate on strengthening the foundation of the banking system by structure technological up graduation and human resource development.
NARASIMHAM COMMITTEE II (April 1998) ACTION TAKEN
Banks are now required to assign capital for market risk. A risk weight of 2.5% for market risk has been introduced on investments in Govt. and other approved securities with effect from the year ending 31st March, 2000. For investments in securities outside SLR, a risk weight of 2.5% for market risk has been introduced with effect from the year ending 31st March, 2001. Prudential norms in respect of advances guaranteed by State Governments where guarantee has been invoked and has remained in default for more than two quarters has been introduced in respect of advances sanctioned against State Government guarantee with effect from April 1, 2000. Banks have been advised to make provisions for advances guaranteed by State Governments which stood invoked as on March 31, 2000, in phases, during the financial years ending March 31, 2000 to March 31, 2003 with a minimum of 25% each year. The RBI has reiterated that banks and financial institutions should adhere to the prudential norms on asset classification, provisioning, etc. and avoid the practice“evergreening”.
XXVI
†††††††††††††††
CHAPTER 2
FUNCTION OF BANK OF INDIA
2.1 FUNCTION OF RESERVE BANK OF INDIA 2.1.1 TRADTIONAL FUNCTIONS 2.1.2 DEVELOPMENTAL FUNCTIONS 2.1.3 SUPERVISORY FUNCTIONS 2.2 TRADITIONAL BANKING FUNCTIONS 2.3 ROLE OF RESERVE BANK OF INDIA 2.4 POLICY RATES AND RESERVE RATIOS 2.5 FUNCTIONS OF COMMERCIAL BANKS 2.6 CHALLENGES IN BANKING SECTOR 2.7 PROBLEM AND PROSPECT OF BANKING IN INDIA
XXVII
2.1 FUNCTION OF RESERVE BANK OF INDIA
As a central bank, the Reserve Bank has significant powers and duties to perform. For smooth and speedy progress of the Indian Financial System, it has to perform some important tasks. Among others it includes maintaining monetary and financial stability, to develop and maintain stable payment system, to promote and develop financial infrastructure and to regulate or control the financial institutions.
1) Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department.
2) Monetary authority
The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors.
3) Regulator and supervisor of the financial system
XXVIII
The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Its objectives are to maintain public confidence in the system, protect depositors' interest and provide cost- effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins.
4) Managerial of exchange control
The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
5) Issuer of currency
The bank issues and exchanges or destroys currency notes and coins that are not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves.
6) Banker of Banks
XXIX
RBI also works as a central bank where commercial banks are account holders and can deposit money.RBI maintains banking accounts of all scheduled banks. [ Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR, bank rate and open market operations. As banker's bank, the RBI facilitates the clearing of cheques between the commercial banks and helps inter-bank transfer of funds. It can grant financial accommodation to schedule banks. It acts as the lender of the last resort by providing emergency advances to the banks. It supervises the functioning of the commercial banks and take action against it if need arises.
2.1.1 TRADTIONAL FUNCTIONS.
Traditional functions are those functions which every central bank of each nation performs all over the world. Basically these functions are in line with the objectives with which the bank is set up. It includes fundamental functions of the Central Bank. They comprise the following tasks.
A. ISSUE OF THE CURRENCY NOTES
The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of smaller denomination. These currency notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes and government of India bonds.
B. BANKER TO THE BANKS
The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial
XXX banks in the country. The RBI can control the volumes of banks reserves and allow other banks to create credit in that proportion. Every commercial bank has to maintain a part of their reserves with its parent's viz. the RBI. Similarly in need or in urgency these banks approach the RBI for fund. Thus it is called as the lender of the last resort.
C. BANKER TO THE GOVERNMENT
The RBI being the apex monitory body has to work as an agent of the central and state governments. It performs various banking function such as to accept deposits, taxes and make payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government. It manages government public debts and maintains foreign exchange reserves on behalf of the government. It provides overdraft facility to the government when it faces financial crunch.
D. EXCHANGE RATE MANAGEMENT
It is an essential function of the RBI. In order to maintain stability in the external value of rupee, it has to prepare domestic policies in that direction. Also it needs to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand and supply of the foreign currency (U.S Dollar) close to each other.
E. CREDIT CONTROL FUNCTION
Commercial bank in the country creates credit according to the demand in the economy. But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. On the other credit creation is below the
XXXI required limit then it harms the growth of the economy. As a central bank of the nation the RBI has to look for growth with price stability.
F. SUPERVISORY FUNCTION
The RBI has been endowed with vast powers for supervising the banking system in the country. It has powers to issue license for setting up new banks, to open new branches, to decide minimum reserves, to inspect functioning of commercial banks in India and abroad, and to guide and direct the commercial banks in India.
2.1.2 DEVELOPMENTAL FUNCTIONS
Along with the routine traditional functions, central banks especially in the developing country like India have to perform numerous functions. These functions are country specific functions and can change according to the requirements of that country. The RBI has been performing as a promoter of the financial system since its inception. Some of the major development functions of the RBI are maintained below.
1. DEVELOPMENT OF THE FINANCIAL SYSTEM
The financial system comprises the financial institutions, financial markets and financial instruments. The sound and efficient financial system is a precondition of the rapid economic development of the nation. The RBI has encouraged establishment of main banking and non-banking institutions to cater to the credit requirements of diverse sectors of the economy.
2. DEVELOPMENT OF AGRICULTURE
XXXII
In an agrarian economy like ours, the RBI has to provide special attention for the credit need of agriculture and allied activities. It has successfully rendered service in this direction by increasing the flow of credit to this sector. It has earlier the Agriculture Refinance and Development Corporation (ARDC) to look after the credit, National Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs).
3. PROVISION OF INDUSTRIAL FINANCE
Rapid industrial growth is the key to faster economic development. In this regard, the adequate and timely availability of credit to small, medium and large industry is very significant. In this regard the RBI has always been instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.
4. PROVISIONS OF TRAINING
The RBI has always tried to provide essential training to the staff of the banking Industry. The RBI has set up the bankers' training colleges at several places. National Institute of Bank Management i.e. NIBM, Bankers Staff College i.e. BSC and College of Agriculture Banking i.e. CAB are few to mention.
5. COLLECTION OF DATA
Being the apex monetary authority of the country, the RBI collects process and Disseminates statistical data on several topics. It includes interest rate, inflation, savings and investments etc. This data proves to be quite useful for researchers and policy makers.
6. PUBLICATION OF THE REPORTS
XXXIII
The Reserve Bank has its separate publication division. This division collects and Publishes data on several sectors of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress of Commercial Banks India., etc. This information is made available to the public also at cheaper rates.
7. PROMOTION OF THE BANKING HABITS
As an apex organization, the RBI always tries to promote the banking habits in the country. It institutionalizes savings and takes measures for an expansion of the banking network. It has set up many institutions such as the Deposit Insurance Corporation- 1962, UTI-1964, IDBI-1964, NABARD-1982, NHB-1988, etc. These organizations develop and promote banking habits among the people. During economic reforms it has taken many initiatives for encouraging and promoting banking in India.
8. PROMOTION OF EXPORT THROUGH RE-FINANCE
The RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India. The Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose.
2.1.3 SUPERVISORY FUNCTIONS
The reserve bank also performs many supervisory functions. It has authority to Regulate and administer the entire banking and financial system. Some of its Supervisory functions are given below. a. GRANTING LICENSE TO THE BANK
XXXIV
The RBI grants license to banks for carrying its business. License is also given for opening extension counters, new branches, even to close down existing branches. b. BANK INSPECTION
The RBI grants license to banks working as per the directives and in a prudent Manner without undue risk. In addition to this it can ask for periodical information from banks on various components of assets and liabilities. c. CONTROL OVER NBFIS
The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs. d. IMPLEMENTATION OF THE DEPOSIT INSURANCE SCHEME
The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits below Rs. One lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.
2.2 TRADITIONAL BANKING FUNCTIONS
In very general terms, the traditional functions of a commercial bank can be classified under following main heads:
1. RECEIVING OF MONEY ON DEPOSIT
XXXV
This is the most important function of banks, as it is largely by means of deposits that a bank prepares the basis for several other activities. The money power of a bank, by which it helps largely the business community and other customers, depends considerably upon the amounts it can borrow by way of deposits. The deposits of a bank can take the form of fixed, savings or current deposits.
2. LENDING OF MONEY
This function is not only very important but is the chief source of profit for banks. By lending money banks place funds at the disposal of the borrower, in exchange for a promise of payment at a future date, enabling the borrowers to carry on their Business/productive activities and meet their other requirements. Banks thus, help their clients to meet their needs with the money lent to them and return the money with interest as per agreed terms. The advances of a bank can take the form of loans, cash, credits, bills purchase / discount facilities.
3. TRANSFERRING MONEY FROM PLACE TO PLACE
This function is also one of the important functions of banks. Banks allow the facilities of transfer of funds by issuing demand drafts, Telegraphic / Telephonic Transfers, Mail Transfer etc.
4. MISCELLANEOUS FUNCTIONS:
Safe custody of valuables, issue of various forms of credits e.g. letters of credit, traveller’s cheques and furnishing guarantees on behalf of customers and providing fee based services are also important functions performed by banks.
2.3 ROLE OF RESERVE BANK OF INDIA
XXXVI
The Reserve Bank of India (RBI) is the central banking system of India and controls the monetary policy of the Rupee as well as currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934 and plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union. The Reserve Bank of India was constituted under the reserve Bank of India Act, 1934 to regulate the issue of bank notes and the maintenance of reserves with a view to securing the monetary stability in India and generally to operate the currency and credit system of the country to its advantage.
The central bank was founded in 1935 to respond to economic troubles after the First World War. The Reserve Bank of India was set up on the recommendations of the Hilton Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for another nine years. The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as to regulate the issue of bank notes, to keep reserves with a view to securing monetary stability in India and generally to operate the currency and credit system in the best interests of the country. The Central Office of the Reserve Bank was initially established in Kolkata, Bengal but was permanently moved to Mumbai in 1937. The Reserve Bank continued to act as the central bank for Myanmar till Japanese occupation of Burma and later up to April 1947, though Burma seceded from the Indian Union in 1937. After partition, the Reserve Bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though originally set up as a shareholders’ bank, the RBI has been fully owned by the government of India since its nationalization in 1949.
Between 1950 and 1960, the Indian government developed a centrally planned economic policy and focused on the
XXXVII agricultural sector. The administration nationalized commercial banks and established, based on the Banking Companies Act, 1949 (later called Banking Regulation Act) a central Bank regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic plan with loans. As a result of bank crashes, the reserve bank was requested to establish and monitor a deposit insurance system. It should restore the trust in the national bank system and was initialized on 7 December 1961. The Indian government founded funds to promote the economy and used the slogan Developing Banking. The Gandhi administration and their successors restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to play the central part of control and support of this public banking sector.
Between 1969 and 1980 the Indian government nationalized 20 banks. The regulation of the economy and especially the financial sector was reinforced by the Gandhi administration and their successors in the 1970s and 1980s. The central bank became the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits. The measures aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sectors, like agri-business and small trade companies.
The branch was forced to establish two new offices in the country for every newly Established office in a town. The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects. A lot of committees analyzed the Indian economy between 1985 and 1991. Their results had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole, and the security and exchange board proposed better methods for more effective markets and the protection of investor interests. The
XXXVIII
Indian financial market was a leading example for so-called "financial repression" (Mackinnon and Shaw). The Discount and Finance House of India began its operations on the monetary market in April1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalization. The national economy came down in July 1991 and the Indian rupee was devalued. The currency lost 18% relative to the US dollar, and the Narsimahmam Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private banking sector. This turning point should reinforce the market and was often called neo-liberal The central bank deregulated bank interests and some sectors of the financial market like the trust and property markets.
The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed nationalized banks in July to interact with the capital market to reinforce their capital base. The central bank founded a subsidiary company- the Bharatiya Reserve Bank Note Mudran Limited-in February 1995 to produce banknotes. The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the foreign exchange market, international investments in India and transactions. The RBI promoted the development of the financial market in the last years, allowed online banking in 2001 and established a new payment system in 2004 - 2005 (National Electronic Fund Transfer). The Security Printing & Minting Corporation of India Ltd ., a merger of nine institutions, was founded in 2006 and produces banknotes and coins.
2.4 POLICY RATES AND RESERVE RATIOS
XXXIX
A) Bank Rate
RBI lends to the commercial banks through its discount window to help the banks meet depositor’s demands and reserve requirements for long term. The Interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if RBI wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 25 June 2012 the bank rate was 9.0%.latest bank rate is 8.75% as on 29/01/2013.
Policy rates, Reserve ratios, lending, and deposit rates as of 30, October, 2012
Bank Rate 8.75 % ( 29/1/2013) Repo Rate 7.75% Reverse Repo Rate 6.75% Cash Reserve Ratio (CRR) 4% Statutory Liquidity Ratio (SLR) 23.0% Base Rate 9.75%–10.50% Reserve Bank Rate 4% Deposit Rate 8.50%–9.00%
B) Reserve requirement cash reserve ratio (CRR)
Every commercial bank has to keep certain minimum cash reserves with RBI. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate, [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 5% and 20% of total of their demand and time liabilities]. RBI uses this tool to increase or
XL decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 4.75%. (As a Reduction in CRR by 0.25% as on Date- 17 September 2012). 25 basis points cut in Cash Reserve Ratio (CRR) on 17 September 2012 it will release Rs 17,000 crore into the system/Market. The RBI lowered the CRR by 25 basis points to 4.25% on 30 October 2012, a move it said would inject about 175 billion rupees into the banking system in order to pre-empt potentially tightening liquidity. The latest CRR as on 29/01/13 is 4%.
C) Statutory Liquidity ratio (SLR)
Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.
In well-developed economies, central banks use open market operations-buying and selling of eligible securities by central bank in the money market to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years.
Generally RBI uses three kinds of selective credit controls:
XLI
1. Minimum margins for lending against specific securities. 2. Ceiling on the amounts of credit for certain purposes. 3. Discriminatory rate of interest charged on certain types of advances.
Direct credit controls in India are of three types:
1. Part of the interest rate structure i.e. on small savings and provident funds, are administratively set. 2. Banks are mandatory required to keep 23% of their deposits in the form of government securities. 3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.
XLII
†††††††††††††††
CHAPTER 3
RETAIL BANKING SERVICES -I
RETAIL BANKING SERVICES
3.1 CREDIT CARDS 3.2 DEBIT CARDS 3.3 TRANSACTIONAL ACCOUNT 3.4 SAVINGS ACCOUNT 3.5 MONEY MARKET ACCOUNT 3.6 CERTIFICATE OF DEPOSIT 3.7 INDIVIDUAL RETIREMENT ACCOUNT
XLIII
RETAIL BANKING SERVICES
3.1 CREDIT CARDS
A credit card is a payment card issued to users as a system of payment . It allows the cardholder to pay for goods and services based on the holder's promise to pay for them. The issuer of the card creates a revolving account and 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.
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. A credit card also differs from a cash card , which can be used like currency by the owner of the card. A credit card differs from a charge card also in that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date.
XLIV
An example of the front in a typical credit card:
1. Issuing bank logo 2. EMV chip on "smart cards" 3. Hologram 4. Credit card number 5. Card brand logo 6. Expiration Date 7. Card Holder Name 8. contactless chip
An example of the reverse side of a typical credit card: 1. Magnetic Stripe 2. Signature Strip 3. Card Security Code
3 The size of most credit cards is 85.60 × 53.98 mm (3 /8 × 1 2 /8 in), conforming to the ISO/IEC 7810 ID-1 standard. Credit
XLV cards have an embossed bank card number complying with the ISO/IEC 7812 numbering standard.
HOW CREDIT CARDS WORK
Credit cards are issued by a credit card issuer, such as a bank or credit union, after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card. Merchants often advertise which cards they accept by displaying acceptance marks – generally derived from logos – or may communicate this orally, as in "We take (brands X, Y, and Z)" or "We don't take credit cards".
When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a card not present transaction (CNP).
Electronic verification systems allow merchants to verify in a few seconds that the card is valid and the credit card customer has sufficient credit to cover the purchase, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or point-of-sale (POS) system with a communications link to the merchant's acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is called Chip and PIN in the United Kingdom and Ireland , and is implemented as an EMV card.
For card not present transactions where the card is not shown (e.g., e-commerce , mail order , and telephone sales), merchants additionally verify that the customer is in physical
XLVI possession of the card and is the authorized user by asking for additional information such as the security code printed on the back of the card, date of expiry, and billing address.
Many banks now also offer the option of electronic statements, either in lieu of or in addition to physical statements, which can be viewed at any time by the cardholder via the issuer's online banking website. Notification of the availability of a new statement is generally sent to the cardholder's email address. If the card issuer has chosen to allow it, the cardholder may have other options for payment besides a physical check, such as an electronic transfer of funds from a checking account. Depending on the issuer, the cardholder may also be able to make multiple payments during a single statement period, possibly enabling him or her to utilize the credit limit on the card several times over.
A. Advertising, solicitation, application and approval
Credit card advertising regulations in the US include the Schumer box disclosure requirements. A large fraction of junk mail consists of credit card offers created from lists provided by the major credit reporting agencies . In the United States, the three major US credit bureaus (Equifax, Trans Union and Experian) allow consumers to opt out from related credit card solicitation offers via its Opt out Pre Screen program.
B. Interest charges
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid. For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received.
XLVII
The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).
The credit card may simply serve as a form of revolving credit , or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.
XLVIII
C. Benefits to customers
The main benefit to each customer is convenience. Compared to debit cards and checks, a credit card allows small short-term loans to be quickly made to a customer who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card.
Different countries offer different levels of protection. In the UK, for example, the bank is jointly liable with the merchant for purchases of defective products over £100. Many credit cards offer rewards and benefits packages, such as enhanced product warranties at no cost, free loss/damage coverage on new purchases, various insurance protections, for example, rental car insurance, common carrier accident protection, and travel medical insurance. Credit cards can also offer reward points which may be redeemed for cash, products, or airline tickets. Research has examined whether competition among card networks may potentially make payment rewards too generous, causing higher prices among merchants, thus actually deteriorating social welfare and its distribution, a situation potentially warranting public policy interventions.
D. Detriments to customers
1. High interest and bankruptcy
Low introductory credit card rates are limited to a fixed term, usually between 6 and 12 months, after which a higher rate is charged. As all credit cards charge fees and interest, some customers become so indebted to their credit card provider that they are driven to bankruptcy . Some credit cards often levy a rate of 20 to 30 percent after a payment is missed. In other cases a fixed charge is levied without change to the interest rate. In some cases universal default may apply: the high default rate is applied
XLIX to a card in good standing by missing a payment on an unrelated account from the same provider. This can lead to a snowball effect in which the consumer is drowned by unexpectedly high interest rates. Further, most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit. First Premier Bank at one point offered a credit card with a 79.9% interest rate; however they discontinued this card February 2011 because of persistent defaults.
Complex fee structures in the credit card industry limit customers' ability to comparison shop, help ensure that the industry is not price-competitive and help maximize industry profits.
2. Inflated pricing for all consumers
Merchants that accept credit cards must pay interchange fees and discount fees on all credit-card transactions. In some cases merchants are barred by their credit agreements from passing these fees directly to credit card customers, or from setting a minimum transaction amount (no longer prohibited in the United States). The result is that merchants may charge all customers (including those who do not use credit cards) higher prices to cover the fees on credit card transactions. In the United States in 2008 credit card companies collected a total of $48 billion in interchange fees, or an average of $427 per family, with an average fee rate of about 2% per transaction. Research shows that a substantial fraction of consumers (about 40 percent) choose a sub-optimal credit card agreement, with some incurring hundreds of dollars of avoidable interest costs.
3. Weakens self regulation
Several studies have shown that consumers are likely to spend more money when they pay by credit card. Researchers suggest that when people pay using credit cards, they do not
L experience the abstract pain of payment. Furthermore, researchers have found that using credit cards can increase consumption of unhealthy food.
4. Benefits to merchants
An example of street markets accepting credit cards. Most simply display the acceptance marks (stylized logos, shown in the upper-left corner of the sign) of all the cards they accept. For merchants , a credit card transaction is often more secure than other forms of payment, such as cheques , because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment (except for legitimate disputes, which are discussed below, and can result in charges back to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises. Finally, credit cards reduce the back office expense of processing checks/cash and transporting them to the bank.
Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk . Credit cards can also aid in securing a sale, especially if the customer does not have enough cash on his or her person or checking account. Extra turnover is generated by the fact that the customer can purchase goods and/or services immediately and is less inhibited by the
LI amount of cash in his or her pocket and the immediate state of his or her bank balance. Much of merchants' marketing is based on this immediacy.
For each purchase, the bank charges the merchant a commission for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee (interchange rate). In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount to compensate for the transaction costs.
5. Costs to merchants
Merchants are charged several fees for accepting credit cards. The merchant is usually charged a commission of around 1 to 3 percent of the value of each transaction paid for by credit card. The merchant may also pay a variable charge, called an interchange rate , for each transaction. In some instances of very low-value transactions, use of credit cards will significantly reduce the profit margin or cause the merchant to lose money on the transaction. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. In some cases merchants may charge users a "credit card supplement", either a fixed amount or a percentage, for payment by credit card. This practice is prohibited by the credit card contracts in the United States, although the contracts allow the merchants to give discounts for cash payment.
Merchants are also required to lease processing terminals, meaning merchants with low sales volumes may have to commit to long lease terms. For some terminals, merchants may also need to subscribe to a separate telephone line. Merchants must also
LII satisfy data security compliance standards which are highly technical and complicated. In many cases, there is a delay of several days before funds are deposited into a merchant's bank account. Because credit card fee structures are very complicated, smaller merchants are at a disadvantage to analyze and predict fees.
6. Parties involved
Cardholder: The holder of the card used to make a purchase; the consumer .
Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case. Cards issued by banks to cardholders in a different country are known as offshore credit cards .
Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.
Acquiring bank : The financial institution accepting payment for the products or services on behalf of the merchant.
Independent sales organization : Resellers (to merchants) of the services of the acquiring bank.
Merchant account : This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
LIII
Credit Card association: An association of card-issuing banks such as Discover , Visa , MasterCard , American Express , etc. that set transaction terms for merchants, card- issuing banks, and acquiring banks.
Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks.
Affinity partner: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers. Insurance providers: Insurers underwriting various insurance protections offered as credit card perks, for example, Car Rental Insurance, Purchase Security, Hotel Burglary Insurance, Travel Medical Protection etc.
The flow of information and money between these parties - always through the card associations is known as the interchange, and it consists of a few steps.
TRANSACTION STEPS
• Authorization : The cardholder presents the card as payment to the merchant and the merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the transaction type and the amount with the issuer (Card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant. An authorization will generate an approval code, which the merchant stores with the transaction.
LIV
• Batching : Authorized transactions are stored in "batches", which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned to the cardholder's available credit. Some transactions may be submitted in the batch without prior authorizations; these are either transactions falling under the merchant's floor limit or ones where the authorization was unsuccessful but the merchant still attempts to force the transaction through.
• Clearing and Settlement : The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction. • Funding : Once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totalling the funds in the batch minus either the "discount rate," "mid- qualified rate", or "non-qualified rate" which are tiers of fees the merchant pays the acquirer for processing the transactions.
• Chargeback’s : A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction. Chargeback’s are typically initiated by the cardholder. In the event of a chargeback , the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.
SECURED CREDIT CARDS
A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total
LV amount of credit desired. Thus if the cardholder puts down $1000, they will be given credit in the range of $500–$1000. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account . Credit card issuers offer this because they have noticed that delinquencies were notably reduced when the customer perceives something to lose if the balance is not repaid.
The cardholder of a secured credit card is still expected to make regular payments, as with a regular credit card, but should they default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows building a positive credit history.
Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days). This means that an account which is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance which is much higher than the actual credit limit on the card. In these cases the total debt may far exceed the original deposit and the cardholder not only forfeits their deposit but is left with an additional debt.
Most of these conditions are usually described in a cardholder agreement which the cardholder signs when their account is opened.
LVI
Secured credit cards are an option to allow a person with a poor credit history or no credit history to have a credit card which might not otherwise be available. They are often offered as a means of rebuilding one's credit. Fees and service charges for secured credit cards often exceed those charged for ordinary non- secured credit cards, however, for people in certain situations, (for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt), secured cards are almost always more expensive than unsecured credit cards.
PREPAID "CREDIT" CARDS
A prepaid credit card is not a true credit card, since no credit is offered by the card issuer: the card-holder spends money which has been "stored" via a prior deposit by the card-holder or someone else, such as a parent or employer. However, it carries a credit-card brand (such as Discover , Visa , MasterCard , American Express , or JCB etc.) and can be used in similar ways just as though it were a regular credit card. Unlike debit cards, prepaid credit cards generally do not require a PIN. An exception is prepaid credit cards with an EMV chip. These cards do require a PIN if the payment is processed via Chip and PIN technology.
After purchasing the card, the cardholder loads the account with any amount of money, up to the predetermined card limit and then uses the card to make purchases the same way as a typical credit card. Prepaid cards can be issued to minors (above 13) since there is no credit line involved. The main advantage over secured credit cards (see above section) is that the cardholder is not required to come up with $500 or more to open an account. With prepaid credit cards purchasers are not charged any interest but are often charged a purchasing fee plus monthly fees after an arbitrary time period. Many other fees also usually apply to a prepaid card.
LVII
Prepaid credit cards are sometimes marketed to teenagers for shopping online without having their parents complete the transaction.
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 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. 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.
A smart card , combining credit card and debit card properties. The 3 by 5 mm security chip embedded in the card is
LVIII shown enlarged in the inset. The contact pads on the card enable electronic access to the chip. The goal of the credit card companies is not to eliminate fraud, but to "reduce it to manageable levels". 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 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 web server 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 e Carte 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 shop 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. Technology provides the option for banks to support many other
LIX 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 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.
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 . Most major credit cards have a hologram . 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.
The United States Secret Service , 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
LX none has proven to help reduce credit card fraud so far. First, the on-line verification system used by merchants is being 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 (Euro pay MasterCard Visa) standard. Third, an additional 3 or 4 digits 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 .
3.2 DEBIT CARDS
A debit card (also known as a bank card or check card) is a plastic card that provides the cardholder electronic access to his or her bank account (s) at a financial institution. Some cards have a stored value with which a payment is made, while most relay a message to the cardholder's bank to withdraw funds from a payee's designated bank account. The card, where accepted, can be used instead of cash when making purchases. In some cases, the primary account number is assigned exclusively for use on the Internet and there is no physical card.
In many countries, the use of debit cards has become so widespread that their volume has overtaken or entirely replaced cheques and, in some instances, cash transactions. The development of debit cards, unlike credit cards and charge cards , has generally been country specific resulting in a number of different systems around the world, which were often incompatible. Since the mid 2000s, a number of initiatives have allowed debit cards issued in one country to be used in other countries and allowed their use for internet and phone purchases.
LXI
Unlike credit and charge cards, payments using a debit card are immediately transferred from the cardholder's designated bank account, instead of them paying the money back at a later date.
Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash. Merchants may also offer cash back facilities to customers, where a customer can withdraw cash along with their purchase.
An example of the front of a typical debit card: 1. Issuing bank logo 2. EMV chip 3. Hologram 4. Card number 5. Card brand logo 6. Expiration date 7. Cardholder's name
LXII
An example of the reverse side of a typical debit card: 1. Magnetic stripe 2. Signature strip 3. Card Security Code
TYPES OF DEBIT CARD SYSTEMS
There are currently three ways that debit card transactions are processed, EFTPOS (also known as online debit or PIN debit), offline debit (also known as signatur e debit) and the Electronic Purse Card System. One physical card can include the functions of all three types, so that it can be used in a number of different circumstances.
Although many debit cards are of the Visa or MasterCard brand, there are many other types of debit card, each accepted only within a particular country or region, for example Switch (now: Maestro) and Solo in the United Kingdom, Interac in Canada, Carte Bleue in France, Laser in Ireland, EC electronic cash (formerly Euro cheque ) in Germany, Union Pay in China and EFTPOS cards in Australia and New Zealand. The need for cross- border compatibility and the advent of the euro recently led to many of these card networks (such as Switzerland's "EC direct", Austria's "Bankomatkasse" and Switch in the United Kingdom) being re-branded with the internationally recognised Maestro logo, which is part of the MasterCard brand. Some debit cards are dual branded with the logo of the (former) national card as well as Maestro (for example, EC cards in Germany, Laser cards in Ireland, Switch and Solo in the UK, Pinpas cards in the Netherlands, Ban contact cards in Belgium, etc.). The use of a debit card system allows operators to package their product more effectively while monitoring customer spending. An example of one of these systems is ECS by Embed International .
LXIII
1) Online Debit System
Online debit cards require electronic authorization of every transaction and the debits are reflected in the user’s account immediately. The transaction may be additionally secured with the personal identification number (PIN) authentication system, some online cards require such authentication for every transaction, essentially becoming enhanced automatic teller machine (ATM) cards . One difficulty with using online debit cards is the necessity of an electronic authorization device at the point of sale (POS) and sometimes also a separate PIN pad to enter the PIN, although this is becoming commonplace for all card transactions in many countries. Overall, the online debit card is generally viewed as superior to the offline debit card because of its more secure authentication system and live status, which alleviates problems with processing lag on transactions that may only issue online debit cards. Some on-line debit systems are using the normal authentication processes of Internet banking to provide real-time on-line debit transactions. The most notable of these are Ideal and Polly.
2) Offline Debit System
Offline debit cards have the logos of major credit cards (for example, Visa or MasterCard ) or major debit cards (for example, Maestro in the United Kingdom and other countries, but not the United States ) and are used at the point of sale like a credit card (with payer's signature). This type of debit card may be subject to a daily limit, and/or a maximum limit equal to the current/checking account balance from which it draws funds. Transactions conducted with offline debit cards require 2–3 days to be reflected on users’ account balances.
In some countries and with some banks and merchant service organizations, a "credit" or offline debit transaction is
LXIV without cost to the purchaser beyond the face value of the transaction, while a fee may be charged for a "debit" or online debit transaction (although it is often absorbed by the retailer ). Other differences are that online debit purchasers may opt to withdraw cash in addition to the amount of the debit purchase (if the merchant supports that functionality); also, from the merchant's standpoint, the merchant pays lower fees on online debit transaction as compared to "credit" (offline).
3) Electronic Purse Card System
Smart-card -based electronic purse systems (in which value is stored on the card chip, not in an externally recorded account, so that machines accepting the card need no network connectivity) are in use throughout Europe since the mid-1990s, most notably in Germany ( Geldkarte ), Austria ( Quick Wertkarte ), the Netherlands (Chipknip ), Belgium ( Proton ), Switzerland (CASH) and France (Moneo , which is usually carried by a debit card). In Austria and Germany, all current bank cards now include electronic purses.
4) Prepaid debit cards
Prepaid debit cards, also called reloadable debit cards, appeal to a variety of users. The primary market for prepaid cards are unbanked people, that is, people who do not use banks or credit unions for their financial transactions, possibly because of poor credit ratings.
The advantages of prepaid debit cards include being safer than carry cash, worldwide functionality due to Visa and MasterCard merchant acceptance, not having to worry about paying a credit card bill or going into debt, the opportunity for anyone over the age of 18 to apply and be accepted without regard to credit quality and the option to direct deposit pay checks and government benefits onto the card for free.
LXV
Some of the first companies to enter this market were MiCash, Rush Card and Net spend, who gained high market share as a result of being first to market. However, since 1999, there have been several new providers, such as Trans Cash, 247card and kobo, that offer a number of other benefits, such as money remittance services, card-to-card transfers, and the ability to apply without a social security number.
5) Legal disputes
There is (December 2012) a legal dispute between Freedom Card (also known as Eagle Cash Card) and Transact Networks Ltd as a result of which Freedom Card customers are unable to load cash on to their cards. Freedom Card in the UK has no known connection with either Freedom Card or Eagle Cash in the USA. ADVANTAGES AND DISADVANTAGES
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 example, legislation often prevents minors from taking out debt, which includes the use of a credit card, but not online debit card transactions. Research has shown that consumers with lower credit scores use debit cards more intensively than those with higher credit scores.
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
LXVI
making transactions quicker and less intrusive. Unlike personal checks, merchants generally do not believe that a payment via a debit card may be later dishonoured.
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.
• DISADVANTAGES OF DEBIT CARDS
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 user's transaction does not reflect available balance. This disadvantage has lessened in the United States with the requirement that an issuer obtain opt-in permission in advance to allow an overdraft on a debit card. Lacking this opt-in, overdrafts are not permitted for electronic transactions. 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 be unknown until later discovery by account holder). 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 a user's PIN using skimming devices can be accomplished much easier with a PIN input than with a signature-based credit transaction.
LXVII
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 entire value of fraudulent debit transactions. Because debit cards allow funds to be immediately transferred from an account when making a purchase, 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 and recover the lost funds, whereas with a credit card, this time may be up to 60 days, and the transactions are removed without losing any credit. 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.
It is a new product introduced in India by Citibank a few years ago in association with MasterCard. A debit card facilitates purchases or payments by the cardholder .It debit money from the account of the cardholder during a transaction. This implies that the cardholder can spend only if his account permits.
3.3 Transactional account
A transactional account is a deposit account held at a bank or other financial institution , for the purpose of securely and quickly providing frequent access to funds on demand, through a variety of different channels. Transactional accounts are meant neither for the purpose of earning interest nor for the purpose of savings, but for convenience of the business or personal client,
LXVIII hence do they tend not to bear interest. Instead, a customer can deposit or withdraw any amount of money any number of times, subject to availability of funds.
A transactional account is known as a checking (or cheque account) in North America , and as a current account or cheque account in the United Kingdom , Hong Kong , India and some other countries. Because money is available on demand it is also sometimes known as a demand account or demand deposit account (DDA), except in the case of NOW accounts in the U.S., which are technically distinct.
All transactional accounts offer itemized lists of all financial transactions, either through a bank statement or a passbook . A transactional account allows the account holder to make or receive payments by:
• ATM cards (withdraw cash at any Automated Teller Machine ) • Debit card (cashless direct payment at a store or merchant) • cash money ( coins and banknotes ) • cheque and money order (paper instruction to pay) • direct debit (pre-authorized debit) • Electronic funds transfers (transfer funds electronically to another account) • giro (funds transfer, direct deposit) • standing order (automatic funds transfer) • SWIFT : International account to account transfer.
LXIX
• Online banking (transfer funds directly to another person via internet banking facility)
3.4 Savings account
Saving account are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money in the narrow sense of a medium of exchange (for example, by writing a cheque ). These accounts let customers set aside a portion of their liquid assets while earning a monetary return. For the bank, money in a savings account may not be callable immediately and in some jurisdictions, does not incur a reserve requirement , freeing up cash from the bank's vault to be lent out with interest. The other major types of deposit account are transactional (checking) account , money market account , and time deposit . Withdrawals from a savings account are occasionally costly, and they are more time-consuming than withdrawals from a demand (current) account. However, most saving accounts do not limit withdrawals, unlike certificates of deposit . In the United States, violations of Regulation D often involve a service charge, or even a downgrade of the account to a checking account. With online accounts, the main penalty is the time required for the Automated Clearing House to transfer funds from the online account to a "brick and mortar" bank where it can be easily accessed. During the period between when funds are withdrawn from the online bank and transferred to the local bank, no interest is earned.
Some financial institutions offer online-only savings accounts. These usually pay higher interest rates and sometimes carry higher security restrictions. Online access has opened the accessibility of offshore financial centres to the wider public.
3.5 Money market account
LXX
A money market account (MMA) or money market deposit account (MMDA) is a financial account that pays interest based on current interest rates in the money markets . Money market accounts typically have a relatively high rate of interest and require a higher minimum balance (anywhere from $1,000 to $10,000 to $25,000) to earn interest or avoid monthly fees. The resulting investment strategy is therefore similar to, and meant to compete with, a money market fund offered by a brokerage . The two account types are otherwise unrelated.
3.6 Certificate of deposit
A certificate of deposit (CD) is a time deposit , a financial product commonly offered to consumers in the United States by banks, thrift institutions , and credit unions . CDs are similar to savings accounts in that they are insured and thus virtually risk free they are "money in the bank". CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions. They are different from savings accounts in that the CD has a specific, fixed term (often monthly, three months, six months, or one to five years), and, usually, a fixed interest rate . It is intended that the CD be held until maturity , at which time the money may be withdrawn together with the accrued interest .
In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand, although this may not be the case in an inverted yield curve situation. Fixed rates are common, but some institutions offer CDs with various forms of variable rates . For example, in mid-2004, interest rates were expected to rise, many banks and credit unions began to offer CDs with a "bump-up" feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during the term of the CD. Sometimes, CDs that are indexed to the stock market , the bond market , or other indices are introduced.
LXXI
A few general guidelines for interest rates are:
• A larger principal should receive a higher interest rate, but may not. • A longer term will usually receive a higher interest rate, except in the case of an inverted yield curve (i.e. preceding a recession) • Smaller institutions tend to offer higher interest rates than larger ones. • Personal CD accounts generally receive higher interest rates than business CD accounts. • Banks and credit unions that are not insured by the FDIC or NCUA generally offer higher interest rates.
HOW CDS WORK
CDs typically require a minimum deposit, and may offer higher rates for larger deposits. The best rates are generally offered on "Jumbo CDs" with minimum deposits of $100,000. The consumer who opens a CD may receive a paper certificate, but it is now common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is often no "certificate" as such. Consumers who wish to have a hard copy verifying their CD purchase may request a paper statement from the bank or print out their own from the financial institution's online banking service.
LXXII a) Closing a CD
Withdrawals before maturity are usually subject to a substantial penalty. For a five-year CD, this is often the loss of six months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw the money before maturity— unless the holder has another investment with significantly higher return or has a serious need for the money.
Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting directions. The notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over" (depositing it into a new CD). Generally, a "window" is allowed after maturity where the CD holder can cash in the CD without penalty. In the absence of such directions, it is common for the institution to roll over the CD automatically, once again tying up the money for a period of time (though the CD holder may be able to specify at the time the CD is opened not to roll over the CD). b) CD refinance
Insured CDs are required by the Truth in Savings Regulation DD to state at the time of account opening the penalty for early withdrawal. It has been generally accepted that these penalties cannot be revised by the depository prior to maturity. However, there have been cases in which a credit union modified its early withdrawal penalty and made it retroactive on existing accounts. The second occurrence happened when Main Street Bank of Texas closed a group of CDs early without full payment of interest. The bank claimed the disclosures allowed them to do so.
The penalty for early withdrawal is the deterrent to allowing depositors to take advantage of subsequent enhanced investment opportunities during the term of the CD. In rising
LXXIII interest rate environments the penalty may be insufficient to discourage depositors from redeeming their deposit and reinvesting the proceeds after paying the applicable early withdrawal penalty. The added interest from the new higher yielding CD may more than offset the cost of the early withdrawal penalty. c) Ladders
While longer investment terms yield higher interest rates, longer terms also may result in a loss of opportunity to lock in higher interest rates in a rising-rate economy. A common mitigation strategy for this opportunity cost is the "CD ladder" strategy. In the ladder strategies, the investor distributes the deposits over a period of several years with the goal of having all one's money deposited at the longest term (and therefore the higher rate), but in a way that part of it matures annually. In this way, the depositor reaps the benefits of the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.
For example, an investor beginning a three-year ladder strategy would start by depositing equal amounts of money each into a 3-year CD, 2-year CD, and 1-year CD. From this point on, a CD will reach maturity every year, at which time the investor would re-invest at a 3-year term. After two years of this cycle, the investor would have all money deposited at a three-year rate, yet have one-third of the deposits mature every year (which can then be reinvested, augmented, or withdrawn).
The responsibility for maintaining the ladder falls on the depositor, not the financial institution. Because the ladder does not depend on the financial institution, depositors are free to distribute a ladder strategy across more than one bank, which can be advantageous as smaller banks may not offer the longer terms found at some larger banks. Although laddering is most common
LXXIV with CDs, this strategy may be employed on any time deposit account with similar terms.
TERMS AND CONDITIONS
There are many variations in the terms and conditions for CDs. The federally required "Truth in Savings" booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. Employees of the institution are generally not familiar with this information, only the written document carries legal weight. If the original issuing institution has merged with another institution, or if the CD is closed early by the purchaser, or there is some other issue, the purchaser will need to refer to the terms and conditions document to ensure that the withdrawal is processed following the original terms of the contract.
• The terms and conditions may be changeable. They may contain language such as "We can add to, delete or make any other changes ("Changes") we want to these Terms at any time."
• The CD may be callable. The terms may state that the bank or credit union can close the CD before the term ends.
• Payment of interest. Interest may be paid out as it is accrued or it may accumulate in the CD.
• Interest calculation. The CD may start earning interest from the date of deposit or from the start of the next month or quarter.
• Right to delay withdrawals. Institutions generally have the right to delay withdrawals for a specified period to stop a bank run .
LXXV
• Withdrawal of principal. May be at the discretion of the financial institution. Withdrawal of principal below a certain minimum—or any withdrawal of principal at all—may require closure of the entire CD. A US Individual Retirement Account CD may allow withdrawal of IRA Required Minimum Distributions without a withdrawal penalty.
• Withdrawal of interest. May be limited to the most recent interest payment or allow for withdrawal of accumulated total interest since the CD was opened. Interest may be calculated to date of withdrawal or through the end of the last month or last quarter.
• Penalty for early withdrawal. May be measured in months of interest, may be calculated to be equal to the institution's current cost of replacing the money, or may use another formula. May or may not reduce the principal—for example, if principal is withdrawn three months after opening a CD with a six-month penalty.
• Fees. A fee may be specified for withdrawal or closure or for providing a certified check .
• Automatic renewal. The institution may or may not commit to sending a notice before automatic rollover at CD maturity. The institution may specify a grace period before automatically rolling over the CD to a new CD at maturity. Be careful as some otherwise respectable banks have been known to renew at scandalously low rates.
3.7 Individual retirement account
An Individual Retirement Account is a form of retirement plan , provided by many financial institutions, that provides tax advantages for retirement savings in the United States as
LXXVI described in IRS Publication 590, Individual Retirement Arrangement (IRAs). The term IRA encompasses an individual retirement account; a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries; and an individual retirement annuity , by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company.
TYPES OF INDIVIDUAL RETIREMENT ACCOUNT
There are several types of IRA:
Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted). Depending upon the nature of the contribution, a traditional IRA may be referred to as a “deductible IRA” or a “non-deductible IRA.” It was introduced with the Tax Reform Act (TRA) of 1986.
Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. Named for Senator William V. Roth, Jr. . The Roth IRA was introduced as part of the Taxpayer Relief Act of 1997.
SEP IRA – a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee’s name, instead of to a pension fund in the company's name.
LXXVII
SIMPLE IRA – a Savings Incentive Match Plan for Employees that requires employer matching contributions to the plan whenever an employee makes a contribution. The plan is similar to a 401(k) plan, but with lower contribution limits and simpler (and thus less costly) administration. Although it is termed an IRA, it is treated separately.
Self-Directed IRA – a self-directed IRA that permits the account holder to make investments on behalf of the retirement plan.
There are two other subtypes of IRA, named Rollover IRA and Conduit IRA, that are viewed by some as obsolete under current tax law (their functions have been subsumed by the Traditional IRA); but this tax law is set to expire unless extended. However, some individuals still maintain these arrangements in order to keep track of the source of these assets. One key reason is that some qualified plans will accept rollovers from IRAs only if they are conduit/rollover IRAs. Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many of the restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds could be rolled into were significantly relaxed. Additional acts have further relaxed similar restrictions. Essentially, most retirement plans can be rolled into an IRA after meeting certain criteria, and most retirement plans can accept funds from an IRA. An example of an exception is a non- governmental 457 plan which cannot be rolled into anything but another non-governmental 457 plan.
The tax treatment of the above types of IRAs except for Roth IRAs is substantially similar, particularly for rules regarding distributions. SEP IRAs and SIMPLE IRAs also have additional rules similar to those for qualified plans governing how contributions can and must be made and what employees are qualified to participate.
LXXVIII
PROTECTION FROM CREDITORS
There are several options of protecting an IRA: (1) roll it over into a qualified plan like a 401(k) , (2) take a distribution, pay the tax and protect the proceeds along with the other liquid assets, or (3) rely on the state law exemption for IRAs. For example, the California exemption statute provides that IRAs and self- employed plans’ assets “are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires.” What is reasonably necessary is determined on a case by case basis, and the courts will take into account other funds and income streams available to the beneficiary of the plan. Debtors who are skilled, well-educated, and have time left until retirement are usually afforded little protection under the California statute as the courts presume that such debtors will be able to provide for retirement.
Many states have laws that prohibit judgments from lawsuits to be satisfied by seizure of IRA assets. For example, IRAs are protected up to $500,000 in Nevada from Writs of Execution. However, this type of protection does not usually exist in the case of divorce, failure to pay taxes, deeds of trust, and fraud. Assets in the IRA must have been deposited before a lawsuit exists to receive this protection.
LXXIX
†††††††††††††††
CHAPTER 4
RETAIL BANKING SERVICES -II
RETAIL BANKING SERVICES
4.1 MORTGAGE LOAN 4.2 HOME EQUITY LOAN 4.3 MUTUAL FUND 4.4 AUTOMATED TELLER MACHINES (ATM)
LXXX
4.5 SMART CARD 4.6 BANKING PRODUCT PORTFOLIO
4.1 Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan. The word mortgage is a French Law term meaning "death contract", meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure .
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank or credit union , either directly or indirectly through intermediaries. Features of mortgage loans such
LXXXI as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
In many jurisdictions, though not all ( Bali, Indonesia being one exception), it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets for mortgages have developed.
MORTGAGE LOAN BASICS a) Basic concepts and legal regulation
According to Anglo-American property law , a mortgage occurs when an owner (usually of a fee simple interest in realty ) pledges his or her interest (right to the property) as security or collateral for a loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property . As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of real property can be, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property (see commercial mortgages ). Although the terminology and precise forms will differ from country to country, the basic components tend to be similar:
LXXXII
Property : the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible.
Mortgage : the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance , or pay off outstanding debt before selling the property.
Borrower : the person borrowing who either has or is creating an ownership interest in the property.
Lender : any lender, but usually a bank or other financial institution . Lenders may also be investors who own an interest in the mortgage through a mortgage-backed security . In such a situation, the initial lender is known as the mortgage originator, which then packages and sells the loan to investors. The payments from the borrower are thereafter collected by a loan servicer .
Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size.
Interest : a financial charge for use of the lender's money.
Foreclosure or repossession : the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.
Completion : legal completion of the mortgage deed, and hence the start of the mortgage.
LXXXIII
Redemption : final repayment of the amount outstanding, which may be a "natural redemption" at the end of the scheduled term or lump sum redemption, typically when the borrower decides to sell the property. A closed mortgage account is said to be "redeemed".
Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system.
Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization . In practice, many variants are possible and common worldwide and within each country.
Lenders provide funds against property to earn interest income , and generally borrow these funds themselves (for example, by taking deposits or issuing bonds ). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization ).
LXXXIV
Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances. b) MORTGAGE LOAN TYPES
There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.
Interest: Interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
Term: Mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization .
Payment amount and frequency: The amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
Prepayment: Some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.
The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also
LXXXV known as a floating rate or variable rate mortgage ). In some countries, such as the United States, fixed rate mortgages are the norm, but floating rate mortgages are relatively common. Combinations of fixed and floating rate mortgages are also common, whereby a mortgage loan will have a fixed rate for some period, for example the first five years, and vary after the end of that period.
In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. Therefore the payment is fixed, although ancillary costs (such as property taxes and insurance) can and do change. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan,
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be, for example, 0.5% to 2% lower than the average 30-year fixed rate the size of the price differential will be related to debt market conditions, including the yield curve .
The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage origination and underwriting process involves checking credit scores, debt-to- income, down payments, and assets. Jumbo mortgages and subprime lending are not supported by government guarantees and face higher interest rates. Other innovations described below can affect the rates as well.
LXXXVI
1) Loan to value and down payments
Upon making a mortgage loan for the purchase of a property, lenders usually require that the borrower make a down payment; that is, contribute a portion of the cost of the property. This down payment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan in which the purchaser has made a down payment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property.
The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.
2) Value appraised, estimated, and actual
Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various ways, but the most common are:
1. Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available.
2. Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official appraisal.
LXXXVII
3. Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances.
3) Payment and debt ratios
In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc. the specifics will vary from location to location.
Some lenders may also require a potential borrower have one or more months of "reserve assets" available. In other words, the borrower may be required to show the availability of enough assets to pay for the housing costs (including mortgage, taxes, etc.) for a period of time in the event of the job loss or other loss of income.
4) Standard or conforming mortgages
Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws, government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80% LTV and no more than one-third of gross income going to mortgage debt.
LXXXVIII
A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which it may be sold. In the United States, a conforming mortgage is one which meets the established rules and procedures of the two major government-sponsored entities in the housing finance market (including some legal requirements). In contrast, lenders who decide to make nonconforming loans are exercising a higher risk tolerance and do so knowing that they face more challenge in reselling the loan. Many countries have similar concepts or agencies that define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to limits or higher risk weightings for non-standard mortgages. For example, banks and mortgage brokerages in Canada face restrictions on lending more than 80% of the property value; beyond this level, mortgage insurance is generally required.
5) Foreign currency mortgage
In some countries with currencies that tend to depreciate, foreign currency mortgages are common, enabling lenders to lend in a stable foreign currency, whilst the borrower takes on the currency risk that the currency will depreciate and they will therefore need to convert higher amounts of the domestic currency to repay the loan.
REPAYING THE MORTGAGE
In addition to the two standard means of setting the cost of a mortgage loan (fixed at a set interest rate for the term, or variable relative to market interest rates), there are variations in how that cost is paid, and how the loan itself is repaid. Repayment depends on locality, tax laws and prevailing culture. There are also various mortgage repayment structures to suit different types of borrower.
LXXXIX
1. Capital and interest
The most common way to repay a secured mortgage loan is to make regular payments of the capital (also called the principal) and interest over a set term . This is commonly referred to as (self) amortization in the U.S. and as a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations, interest may be calculated on the basis of a 360-day year, for example, interest may be compounded daily, yearly, or semi-annually, prepayment penalties may apply, and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices.
Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change. Some lenders and 3rd parties offer a bi-weekly mortgage payment program designed to accelerate the payoff of the loan.
An amortization schedule is typically worked out taking the principal left at the end of each month, multiplying by the
XC monthly rate and then subtracting the monthly payment. This is typically generated by an amortization calculator using the following formula:
Where: Is the initial principal Is the percentage rate used each payment; for a monthly payment, take the Annual Percentage Rate (APR) /12 months
Is the number of payments; for monthly payments over 30 years, 12 months x 30 years = 360 payments?
2. Interest only
The main alternative to a capital and interest mortgage is an interest-only mortgage , where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage . Historically, investment-backed mortgages offered various tax advantages over repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to clear the debt.
XCI
Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest rate).
3. Interest Only Lifetime Mortgage
Recent Financial Services Authority guidelines to UK lenders regarding interest only mortgages has tightened the criteria on new lending on an interest only basis. The problem for many people has been the fact that no repayment vehicle had been implemented, or the vehicle itself (e.g. endowment/ISA policy) performed poorly and therefore insufficient funds were available to repay the capital balance at the end of the term.
Moving forward, the FSA under the Mortgage Market Review (MMR) have stated there must be strict criteria on the repayment vehicle being used. As such the likes of Nationwide and other lenders have pulled out of the interest only market.
Resurgence in the equity release market has been the introduction of interest only lifetime mortgages. Where an interest only mortgage has a fixed term, an interest only lifetime mortgage will continue for the rest of the mortgagor’s life. These schemes have proved of interest to people who do like the roll-up effect (compounding) of interest on traditional equity release schemes. They have also proved beneficial to people who had an interest only mortgage with no repayment vehicle and now need to settle the loan. These people can now effectively remortgage onto an interest only lifetime mortgage to maintain continuity.
Interest only lifetime mortgage schemes are offered by two lenders currently - Stone haven & more2life. They work by having the options of paying the interest on a monthly basis. By
XCII paying off the interest means the balance will remain level for the rest of their life. This market is set to increase as more retirees require finance in retirement.
4. No capital or interest
For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year.
These arrangements are variously called reverse mortgages , lifetime mortgages or equity release mortgage s (referring to home equity ), depending on the country. The loans are typically not repaid until the borrowers are deceased, hence the age restriction. For further details, see equity release .
5. Interest and partial capital
In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short of that term. In the UK, a partial repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing is arranged on a capital and interest (repayment) basis.
6. Variations
Graduated payment mortgage loan have increasing costs over time and are geared to young borrowers who expect wage increases over time. Balloon payment mortgages have only partial amortization, meaning that amount of monthly payments due are
XCIII calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term, and at the end of the term a balloon payment is due. When interest rates are high relative to the rate on an existing seller's loan, the buyer can consider assuming the seller's mortgage . A wraparound mortgage is a form of seller financing that can make it easier for a seller to sell a property. A biweekly mortgage has payments made every two weeks instead of monthly.
Budget loans include taxes and insurance in the mortgage payment package loans add the costs of furnishings and other personal property to the mortgage. Buy down mortgages allow the seller or lender to pay something similar to mortgage points to reduce interest rate and encourage buyers. Homeowners can also take out equity loans in which they receive cash for a mortgage debt on their house. Shared appreciation mortgages are a form of equity release . In the US, foreign nationals due to their unique situation face Foreign National mortgage conditions.
Flexible mortgages allow for more freedom by the borrower to skip payments or prepay. Offset mortgages allow deposits to be counted against the mortgage loan. In the UK there is also the endowment mortgage where the borrowers pay interest while the principal is paid with a life insurance policy.
Commercial mortgages typically have different interest rates, risks, and contracts than personal loans. Participation mortgages allow multiple investors to share in a loan. Builders may take out blanket loans which cover several properties at once. Bridge loans may be used as temporary financing pending a longer-term loan. Hard money loans provide financing in exchange for the mortgaging of real estate collateral.
7. Foreclosure and non-recourse lending
XCIV
In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally, non- payment of the mortgage loan - occur. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are non-recourse loans if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt.
In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by the relevant government. There are strict or judicial foreclosures and non-judicial foreclosures, also known as power of sale foreclosures. In some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.
4.2 Home equity loan
A home equity loan is a type of loan in which the borrower uses the equity in their home as collateral . Home equity loans are often used to finance major expenses such as home repairs, medical bills or college education. A home equity loan creates a lien against the borrower's house, and reduces actual home equity. Home equity loans come in two types: home equity term, which is a fixed term, and home equity line of credit which is variable.
Most home equity loans require good to excellent credit history , and reasonable loan-to-value and combined loan-to-value ratios . Home equity loans come in two types: closed end (traditionally just called a home-equity loan) and open end (aka a home-equity line of credit). Both are usually referred to as second
XCV mortgages , because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. Home equity loan can be used as a person's main mortgage in place of a tradition mortgage, however you cannot purchase a home using a home equity loan, and you can only use a home equity loan to refinance. In the United States, in most cases it is possible to deduct home equity loan interest on one's personal income taxes . In other countries such as Australia, these loans are only tax deductible if the proceeds are used for investment purposes.
There is a specific difference between a home equity loan and a home equity line of credit (HELOC). A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a onetime lump-sum loan, often with a fixed interest rate. This is a revolving credit loan, also referred to as a home equity line of credit, where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to an amount equal to the value of the home, minus any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due. Typically, the interest rate is based on the prime rate plus a margin.
FEES OF HOME EQUITY LOAN
A brief list of fees that may apply for home equity loans: • Appraisal fees • Originator fees • Title fees
XCVI
• Stamp duties • Arrangement fees • Closing fees • Early pay-off fee
Surveyor and conveyor or valuation fees may also apply to loans but some may be waived. The survey or conveyor and valuation costs can often be reduced, provided you find your own licensed surveyor to inspect the property considered for purchase. The title charges in secondary mortgages or equity loans are often fees for renewing the title information. Most loans will have fees of some sort, so make sure you read and ask several questions about the fees that are charged.
4.3 Mutual fund
A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities . While there is no legal definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies." Most mutual funds are "open-ended," meaning investors can buy or sell shares of the fund at any time. Hedge funds are not considered a type of mutual fund.
The term mutual fund is less widely used outside of the United States and Canada. For collective investment vehicles outside of the United States, see articles on specific types of funds including open-ended investment companies , SICAVs , unitized insurance funds , unit trusts and Undertakings for Collective Investment in Transferable Securities , which are usually referred to by their acronym UCITS.
XCVII
In the United States, mutual funds must be registered with the Securities and Exchange Commission, overseen by a board of directors (or board of trustees if organized as a trust rather than a corporation or partnership) and managed by a registered investment adviser. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U.S. Internal Revenue Code.
Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. They have a long history in the United States. Today they play an important role in household finances, most notably in retirement planning.
There are 3 types of U.S. mutual funds: open-end, unit investment trust, and closed-end. The most common type, the open-end fund, must be willing to buy back shares from investors every business day. Exchange-traded funds (or "ETFs" for short) are open-end funds or unit investment trusts that trade on an exchange. Open-end funds are most common, but exchange- traded funds have been gaining in popularity.
Mutual funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds may also be categorized as index or actively managed.
Investors in a mutual fund pay the fund’s expenses, which reduce the fund's returns/performance. There is controversy about the level of these expenses. A single mutual fund may give investors a choice of different combinations of expenses (which may include sales commissions or loads) by offering several different types of share classes.
TYPES OF MUTUAL FUND
XCVIII
There are 3 principal types of mutual funds in the United States: open-end funds , unit investment trusts (UITs); and closed- end funds . Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange; they have gained in popularity recently. While the term "mutual fund" may refer to all three types of registered investment companies, it is more commonly used to refer exclusively to the open-end type.
1. Open-end funds
Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value. A professional investment manager oversees the portfolio, buying and selling securities as appropriate. The total investment in the fund will vary based on share purchases, share redemptions and fluctuation in market valuation. There is no legal limit on the number of shares that can be issued.
Open-end funds are the most common type of mutual fund. At the end of 2011, there were 7,581 open-end mutual funds in the United States with combined assets of $11.6 trillion.
2. Closed-end funds
Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering . Their shares are then listed for trading on a stock exchange . Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares to another investor in the market; the price they receive may be significantly different from net asset value. It may be at a "premium" to net asset value (meaning that it is higher than net asset value) or, more
XCIX commonly, at a "discount" to net asset value (meaning that it is lower than net asset value). A professional investment manager oversees the portfolio, buying and selling securities as appropriate.
At the end of 2011, there were 634 closed-end funds in the United States with combined assets of $239 billion.
3. Unit investment trusts
Unit investment trusts or UITs issue shares to the public only once, when they are created. UITs generally have a limited life span, established at creation. Investors can redeem shares directly with the fund at any time (as with an open-end fund) or wait to redeem upon termination of the trust. Less commonly, they can sell their shares in the open market.
Unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at the creation of the UIT and does not change. At the end of 2011, there were 6,022 UITs in the United States with combined assets of $60 billion.
4. Exchange-traded funds
A relatively recent innovation, the exchange-traded fund or ETF is often structured as an open-end investment company, though ETFs may also be structured as unit investment trusts, partnerships, investments trust, grantor trusts or bonds (as an exchange-traded note ). ETFs combine characteristics of both closed-end funds and open-end funds. Like closed-end funds, ETFs are traded throughout the day on a stock exchange at a price determined by the market. However, as with open-end funds, investors normally receive a price that is close to net asset value. To keep the market price close to net asset value, ETFs issue and redeem large blocks of their shares with institutional investors.
C
Most ETFs are index funds. ETFs have been gaining in popularity. At the end of 2011, there were 1,134 ETFs in the United States with combined assets of $1.1 trillion.
5. Investments and classification
Mutual funds are normally classified by their principal investments, as described in the prospectus and investment objective. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Within these categories, funds may be sub classified by investment objective, investment approach or specific focus. The SEC requires that mutual fund names not be inconsistent with a fund's investments. For example, the "ABC New Jersey Tax- Exempt Bond Fund" would generally have to invest, under normal circumstances, at least 80% of its assets in bonds that are exempt from federal income tax, from the alternative minimum tax and from taxes in the state of New Jersey. Bond, stock and hybrid funds may be classified as either index (passively managed) funds or actively managed funds.
6. Money market funds
Money market funds invest in money market instruments, which are fixed income securities with a very short time to maturity and high credit quality. Investors often use money market funds as a substitute for bank savings accounts, though money market funds are not government insured, unlike bank savings accounts.
Money market funds strive to maintain a $1.00 per share net asset value, meaning that investors earn interest income from the fund but do not experience capital gains or losses. If a fund fails to maintain that $1.00 per share because its securities have declined in value, it is said to "break the buck". Only two money
CI market funds have ever broken the buck: Community Banker's U.S. Government Money Market Fund in 1994 and the Reserve Primary Fund in 2008. At the end of 2011, money market funds accounted for 23% of open-end fund assets.
7. Bond funds
Bond funds invest in fixed income or debt securities. Bond funds can be sub classified according to the specific types of bonds owned (such as high-yield or junk bonds , investment-grade corporate bonds, government bonds or municipal bonds) or by the maturity of the bonds held (short-, intermediate- or long-term). Bond funds may invest in primarily U.S. securities (domestic or U.S. funds), in both U.S. and foreign securities (global or world funds), or primarily foreign securities (international funds).At the end of 2011, bond funds accounted for 25% of open-end fund assets.
8. Stock or equity funds
Stock or equity funds invest in common stocks which represent an ownership share (or equity) in corporations. Stock funds may invest in primarily U.S. securities (domestic or U.S. funds), in both U.S. and foreign securities (global or world funds), or primarily foreign securities (international funds). They may focus on a specific industry or sector.
A stock fund may be sub classified along two dimensions: (1) market capitalization and (2) investment style (i.e., growth vs. blend/core vs. value). The two dimensions are often displayed in a grid known as a "style box."Market capitalization ("cap") indicates the size of the companies in which a fund invests, based on the value of the company's stock. Each company's market capitalization equals the number of shares outstanding times the market price of the stock. Market capitalizations are typically divided into the following categories:
CII
• Micro cap • Small cap • Mid cap • Large cap
While the specific definitions of each category vary with market conditions, large cap stocks generally have market capitalizations of at least $10 billion, small cap stocks have market capitalizations below $2 billion, and micro cap stocks have market capitalizations below $300 million. Funds are also classified in these categories based on the market caps of the stocks that it holds.
Classified according to their investment style: growth, value or blend (or core). Growth funds seek to invest in stocks of fast-growing companies. Value funds seek to invest in stocks that appear cheaply priced. Blend funds are not biased toward either growth or value. At the end of 2011, stock funds accounted for 46% of the assets in all U.S. mutual funds.
9. Hybrid funds
Hybrid funds invest in both bonds and stocks or in convertible securities . Balanced funds, asset allocation funds, target date or target risk funds and lifecycle or lifestyle funds are all types of hybrid funds. Hybrid funds may be structured as funds of funds, meaning that they invest by buying shares in other mutual funds that invest in securities. Most fund of funds invest in affiliated funds (meaning mutual funds managed by the same fund sponsor), although some invest in unaffiliated funds (meaning those managed by other fund sponsors) or in a combination of the two. At the end of 2011, hybrid funds accounted for 7% of the assets in all U.S. mutual funds.
10. Index (passively managed) versus actively managed
CIII
An index fund or passively managed fund seeks to match the performance of a market index, such as the S&P 500 index, while an actively managed fund seeks to outperform a relevant index through superior security selection.
11. Time deposit
A time deposit (also known as a certificate of deposit in the United States , a term deposit, particularly in Canada , Australia and New Zealand ; a bond in the United Kingdom ; Fixed Deposits in India and in some other countries) is a money deposit at a banking institution that cannot be withdrawn for a certain "term" or period of time (unless a penalty is paid) . When the term is over it can be withdrawn or it can be held for another term. Generally speaking, the longer the term the better the yield on the money. In its strict sense, certificate deposit is different from that of time deposit in terms of its negotiability. CDs are negotiable and can be rediscounted when the holder needs some liquidity, while time deposits must be kept until maturity.
The opposite, sometimes known as a sight deposit or "on call" deposit, can be withdrawn at any time, without any notice or penalty: e.g., money deposited in a checking account or savings account in a bank. The rate of return is higher than for savings accounts because the requirement that the deposit be held for a prespecified term gives the bank the ability to invest it in a higher- gain financial product class. However, the return on a time deposit is generally lower than the long-term average of that of investments in riskier products like stocks or bonds.
A deposit of funds in a savings institution is made under an agreement stipulating that (a) the funds must be kept on deposit for a stated period of time, or (b) the institution may require a minimum period of notification before a withdrawal is made.
CIV
4.4 AUTOMATED TELLER MACHINES (ATM)
An ATM card (also known as a bank card, client card, key card, or cash card) is a card issued by a financial institution , such as a bank , credit union , or building society , that can be used in an automated teller machine (ATM) for transactions such as: deposits, withdrawals, obtaining account information, and other types of transactions, often through interbank networks .
It can also be used on improvised ATMs, such as merchants' card terminals that deliver ATM features without any cash drawer (commonly referred to as mini ATMs). These terminals can also be used as Cashless scrip ATMs by cashing the fund transfer receipt at the merchant's Cashier
THE DIMENSIONS OF AN ATM CARD
The size of ATM cards is 85.90 × 54.98 mm (3.377 × 2.09 in) and rounded corners with a radius of 2.65–3.48 ml. in accordance with ISO/IEC 3459 ID-1 , the same size as other payment cards, such as credit, debit and other cards.
NON ATM USES OF AN ATM CARD
Some ATM cards can also be used: • at a branch, as identification for in-person transactions • for EFTPOS ( Point of Sale / POS) purchases
CV
Unlike an offline debit card that is signature based, in- store EFTPOS purchases or refunds with an ATM card require authentication through a personal identification number (PIN), similar to an online debit card that is also PIN based. This means that ATM cards cannot be used at merchants that are without a direct connection to an interbank network.
For other types of transactions through telephone or online banking , this may be performed with an ATM card without in- person authentication. This includes account balance inquiries, electronic bill payments , or in some cases, online purchases (see Interac Online ).
ATM CARD NETWORKS
In some banking networks, the two functions of ATM cards and debit cards are combined into a single card called simply as a debit card or also commonly called as bank card. These are able to perform banking tasks at ATMs and also make point-of-sale transactions, with both features using a PIN.
ATM CARDS MISUSE
Due to increased illegal copies of cards with a magnetic stripe, the European Payments Council established a Card Fraud Prevention Task Force in 2003 that spawned a commitment to migrate all ATMs and POS applications to use a chip-and-PIN solution until the end of 2010. The "SEPA for Cards" has completely removed the magnetic stripe requirement from the
CVI former Maestro debit cards , and the savings banks have announced that they will ship their debit cards without a magnetic stripe beginning in 2012, making them unusable in any ATM or merchant that is only capable of reading a magnetic stripe card.
ATM is designed to perform the most important function of bank. It is operated by plastic card with its special features. The plastic card is replacing cheque, personal attendance of the customer, banking hour’s restrictions and paper based verification. There are debit cards. ATMs used as spring board for Electronic Fund Transfer. ATM itself can provide information about customers account and also receive instructions from customers - ATM cardholders. An ATM is an Electronic Fund Transfer terminal capable of handling cash deposits, transfer between accounts, balance enquiries cash withdrawals and pay bills. It may be on-line or 0ffline. The on-line ATN enables the customer to avail banking facilities from anywhere. In off-line the facilities are confined to that particular ATM assigned. Any customer possessing ATM card issued by the Shared Payment Network System can go to any ATM linked to Shared Payment Networks and perform his transactions
ATMs feature user-friendly graphic screens with easy to follow instructions. The ATMs Interact with customers in their local language for increased convenience. ICICI Bank’s ATM network is one of the largest and most widespread ATM network in India. Following are the features available on ATMs which can be accessed from any whereat anytime:
a. Cash Withdrawal b. Cash Deposit c. Balance Enquiry d. Cheque Book Request e. Transaction at various merchant establishments
CVII
4.5 SMART CARD
The smart card, a latest additional to the world of banking and information technology has emerged as the largest volume driven end-product in the world due to its data portability, security and convenience. Smart Card is similar in size to today’s plastic payment card; it has a memory chip embedded in it. The chip stores electronic data and programmes that are protected by advanced security features. When coupled with a reader, the smart card has the processing power to serve many different applications. As an access-control device, smart Cards make personal and business data available only to appropriate users. To ensure the confidentiality of all banking service, smart cards have mechanisms offering a high degree of security. These mechanisms are based on private and public key cryptography combined with a digital certificate, one of the most advanced security techniques currently available. In fact, it is possible to connect to the web banking service without a smart card.
Banks are adding chips to their current magnetic stripe cards to enhance security and offer new service, called Smart Cards. Smart Cards allow thousands of times of information storable on magnetic stripe cards. In addition, these cards are highly secure, more reliable and perform multiple functions. They hold a large amount of personal information, from medical and health history to personal banking and personal preferences.
Currently around 78 per cent of the bank's customer base is registered for Internet banking."To get started, all you need is a computer with a modem or other dial-up device, a checking account with a bank that offers online service and the patience to complete about a one-page application--which can usually be done online.
4.6 BANKING PRODUCT PORTFOLIO
CVIII
1. DEPOSITS
There are many products in retail banking like Fixed Deposit, Savings Account, Current Account, Recurring Account, NRI Account, Corporate Salary Account, Free Demat Account, Kid’s Account, Senior Citizen Scheme, Cheque Facilities, Overdraft Facilities, Free Demand Draft Facilities, Locker Facilities, Cash Credit Facilities, etc. They are listed and explained as follows:
(i) FIXED DEPOSIT
The deposit with the bank for a period, which is specified at the time of making the deposit, is known as fixed deposit. Such deposits are also known as FD or term deposit. FD is repayable on the expiry of a specified period. The rate of interest and other terms and conditions on which the banks accepted FD were regulated by the RBI, in section 21 and 35Aof the Banking Regulation Act1949.Each bank has prescribed their own rate of interest and has also permitted higher rates on deposits above a specified amount. RBI has also permitted the banks to formulate FD schemes specially meant for senior citizen with higher interest than normal.
(ii) SAVING ACCOUNT
Saving bank account is meant for the people who wish to save a part of their current income to meet their future needs and they can also earn in interest on their savings. The rate of interest payable on by the banks on deposits maintained in savings account is prescribed by RBI. Now-a-days the fixed deposit is also linked with saving account. Whenever there is excess of balance in saving account it will automatically transfer into fixed deposit and if there is shortfall of funds in savings account, by issuing
CIX cheque the money is transferred from fixed deposit to saving account. Different banks give different name to this product.
(iii) CURRENT ACCOUNT
A current account is an active and running account, which may be operated upon any number of times during a working day. There is no restriction on the number and the amount of withdrawals from a current account. Current account, suit the requirements of a big businessmen, joint stock companies, institutions, public authorities and public corporation etc.
(iv) RECURRING DEPOSIT
A variant of the saving bank a/c is the recurring deposit or cumulative deposit a/c introduced by banks in recent years. Here, a depositor is required to deposit an amount chosen by him. The rate of interest on the recurring deposit account is higher than as compared to the interest on the saving account. Banks open such accounts for periods ranging from 1 to 10 years. There curing deposit account can be opened by any number of persons, more than one person jointly or severally, by a guardian in the name of a minor and even by a minor.
(v) NRI ACCOUNT
NRI accounts are maintained by banks in rupees as well as in foreign currency. Four types of Rupee account can be open in the names of NRI:
a. Non Resident Rupee Ordinary Account (NRO) b. Non Resident External Account (NRE) c. Non Resident (Non Reportable Deposit Scheme) (NRNR)
CX d. Non Resident (special) Rupee Account Scheme (NRSR)
Apart from this, foreign currency account is the account in foreign currency. The account can be open normally in US Dollar, Pound Sterling, and Euro. The accounts of NRIs are Indian millennium deposit, Resident foreign currency, housing finance scheme for NRI investment schemes.
(vi) CORPORATE SALARY ACCOUNT
Corporate Salary account is a new product by certain private sector banks, foreign banks and recently by some public sector banks also. Under this account salary is deposited in the account of the employees by debiting the account of employer. The only thing required is the account number of the employees and the amount to be paid them as salary. In certain cases the minimum balance required is zero. All other facilities available in savings a/c are also available in corporate salary account.
(vii) KID’S ACCOUNT (MINOR ACCOUNT)
Children are invited as customer by certain banks. Under this, Account is opened in the name of kids by parents or guardians. The features of kid’s account are free personalized cheque book which can be used as a gift cheque, internet banking, investment services etc.
(viii) SENIOR CITIZENSHIP SCHEME
Senior citizens can open an account and on that account they can get interest rate somewhat more than the normal rate of interest. This is due to some social responsibilities of banks towards aged persons whose earnings are mainly on the interest rate.
CXI
2. LOANS AND ADVANCES
The main business of the banking company is lending of funds to the constituents, mainly traders, business and industrial enterprises. The major portion of a bank’s funds is employed by way of loans and advances, which is the most profitable employment of its funds. There are three main principles of bank lending that have been followed by the commercial banks and they are safety, liquidity, and profitability. Banks grant loans for different periods like short term, medium term, and long term and also for different purpose.
(i) PERSONAL LOANS
This is one of the major loans provided by the banks to the individuals. There the borrower can use for his/her personal purpose. This may be related to his/her business purpose. The amount of loan is depended on the income of the borrower and his/her capacity to repay the loan.
(ii) HOUSING LOANS
NHB is the wholly own subsidiary of the RBI which control and regulate whole industry as per the guidance and information. The purpose of loan is mainly for purchase, extension, renovation, and land development.
(iii) EDUCATION LOANS
Loans are given for education in country as well as abroad.
(iv) VEHICAL LOANS
Loans are given for purchase of scooter, auto-rickshaw, car, bikes etc. Low interest rates, increasing income levels of
CXII people are the factors for growth in this sector. Even for second hand car finance is available.
(v) PREFESSIONAL LOANS
Loans are given to doctor, C.A, Architect, Engineer or Management Consultant. Here the loan repayment is normally done in the form of equated monthly.
(vi) LOANS AGAINST SHARES AND SECURITIE
Finance against shares is given by banks for different uses. Now-a-days finance against shares are given mostly in demat shares. A margin of 50% is normally accepted by the bank on market value. For these loans the documents required are normally DP notes, letter of continuing security, pledge form, power of attorney. This loan can be used for business or personal purpose.
†††††††††††††††
CHAPTER 5
CHANNELS OF BANKINGCXIII SECTOR IN INDIA - I
CHANNELS OF BANKING SECTOR IN INDIA
5.1 CALL CENTRE 5.2 NET BANKING 5.3 MOBILE BANKING 5.4 TELEPHONE BANKING 5.5 ONLINE BANKING
CXIV
CHANNELS OF BANKING SECTOR IN INIDA
5.1 CALL CENTRE
A call centre or call centre is a centralised office used for the purpose of receiving or transmitting a large volume of requests by telephone . An inbound call centre is operated by a company to administer incoming product support or information inquiries from consumers. Outbound call centres are operated for telemarketing , solicitation of charitable or political donations and debt collection. In addition to a call centre, collective handling of letter , fax , live chat , and e-mail at one location is known as a contact centre.
A call centre is operated through an extensive open workspace for call centre agents , with work stations that include a computer for each agent, a telephone set/ headset connected to a telecom switch , and one or more supervisor stations. It can be independently operated or networked with additional centres, often linked to a corporate computer network , including mainframes , microcomputers and LANs . Increasingly, the voice and data pathways into the centre are linked through a set of new technologies called computer telephony integration (CTI).
A contact centre, also known as customer interaction centre is a central point of any organization from which all customer contacts are managed. Through contact centres, valuable information about company are routed to appropriate people, contacts to be tracked and data to be gathered. It is generally a part of company’s customer relationship management (CRM). Today, customers contact companies by telephone, email, online chat, fax, and instant message .
CXV
TECHNOLOGY
Call centre technology is subject to improvements and innovations. Some of these technologies include speech recognition software to allow computers to handle first level of customer support , text mining and natural language processing to allow better customer handling, agent training by automatic mining of best practices from past interactions, support automation and many other technologies to improve agent productivity and customer satisfaction . Automatic lead selection or lead steering is also intended to improve efficiencies, both for inbound and outbound campaigns, whereby inbound calls are intended to quickly land with the appropriate agent to handle the task, whilst minimizing wait times and long lists of irrelevant options for people calling in, as well as for outbound calls, where lead selection allows management to designate what type of leads go to which agent based on factors including skill, socioeconomic factors and past performance and percentage likelihood of closing a sale per lead.
The concept of the Universal Queue standardizes the processing of communications across multiple technologies such as fax, phone, and email whilst the concept of a Virtual queue provides callers with an alternative to waiting on hold when no agents are available to handle inbound call demand.
A typical call centre telephone. Note: no handset, phone is for headset use only.
CXVI
A. Premise-based Call Centre Technology
Historically, call centres have been built on PBX equipment that is owned and hosted by the call centre operator. The PBX might provide functions such as Automatic Call Distribution , Interactive Voice Response , and skills-based routing . The call centre operator would be responsible for the maintenance of the equipment and necessary software upgrades as released by the vendor.
B. Virtual Call Centre Technology
With the advent of the Software as a service technology delivery model, the virtual call centre has emerged. In a virtual call centre model, the call centres operator does not own, operate or host the equipment that the call centre runs on. Instead, they subscribe to a service for a monthly or annual fee with a service provider that hosts the call centre telephony equipment in their own data centre. Such a vendor may host many call centres on their equipment. Agents connect to the vendor's equipment through traditional PSTN telephone lines, or over Voice over IP . Calls to and from prospects or contacts originate from or terminate at the vendor's data centre, rather than at the call centre operator's premise. The vendor's telephony equipment then connects the calls to the call centre operator's agents.
Virtual Call Centre Technology allows people to work from home, instead of in a traditional, centralised, call centre location, which increasingly allows people with physical or other disabilities that prevent them from leaving the house, to work.
C. Cloud Computing for Call Centres
Cloud computing for call centres extends cloud computing to Software as a service , or hosted, on-demand call centres by
CXVII providing application programming interfaces (APIs) on the call centre cloud computing platform that allow call centre functionality to be integrated with cloud-based Customer relationship management , such as Salesforce.com or Oracle CRM and leads management and other applications. The APIs typically provide programmatic access to two key groups of features in the call centre platform:
Computer Telephony Integration (CTI) APIs provide developers with access to basic telephony controls and sophisticated call handling on the call centre platform from a separate application. Configuration APIs provide programmatic control of administrative functions of the call centre platform which are typically accessed by a human administrator through a Graphical User Interface (GUI).
5.2 NET BANKING
This facilitates the customers to do all their banking operations from their home by using the internet facility. With Net Banking one can carry out all banking and shopping transactions safely and with total confidentiality. With Net Banking one can easily perform various functions: a. Check Account Balance b. Download Account Statement c. Request for a stop payment of a cheque. d. Request for a new cheque book. e. Access demats account f. Transfer funds. g. Facilitate bill Payments. h. Pay Credit Card dues instantly.
CXVIII
5.3 MOBILE BANKING
Mobile banking is a system that allows customers of a financial institution to conduct a number of financial transactions through a mobile device such as a mobile phone or personal digital assistant . Mobile banking differs to mobile payments which involves the use of a mobile device to pay for goods or services either at the point of sale or remotely, analogously to the use of a debit or credit card to effect an EFTPOS payment. The earliest mobile banking services were offered over SMS , a service known as SMS banking . With the introduction of smart phones with WAP support enabling the use of the mobile web in 1999, the first European banks started to offer mobile banking on this platform to their customers.
Mobile banking has until recently (2010) most often been performed via SMS or the mobile web . Apple's initial success with iPhone and the rapid growth of phones based on Google's Android (operating system) have led to increasing use of special client programs, called apps, downloaded to the mobile device. With that said advancements in web technologies such as HTML5 , CSS3 and JavaScript have seen more banks launching mobile web based services to complement native applications. A recent study (May 2012) by Mapa Research suggests that over a third of banks have mobile device detection upon visiting the banks' main website. A number of things can happen on mobile detection such as redirecting to an app store, redirection to a mobile banking specific website or providing a menu of mobile banking options for the user to choose from.
A) Mobile banking conceptual model
In one academic model, mobile banking is defined as Mobile Banking refers to provision and an ailment of banking-
CXIX and financial services with the help of mobile telecommunication devices. The scope of offered services may include facilities to conduct bank and stock market transactions, to administer accounts and to access customised information."
According to this model mobile banking can be said to consist of three inter-related concepts: • Mobile accounting • Mobile brokerage • Mobile financial information services
Most services in the categories designated accounting and brokerage are transaction-based. The non-transaction-based services of an informational nature are however essential for conducting transactions - for instance, balance inquiries might be needed before committing a money remittance. The accounting and brokerage services are therefore offered invariably in combination with information services. Information services, on the other hand, may be offered as an independent module. Mobile banking may also be used to help in business situations as well as financial.
B) Mobile banking services
Typical mobile banking services may include:
1. Account information
- Mini-statements and checking of account history - Alerts on account activity or passing of set thresholds - Monitoring of term deposits - Access to loan statements - Access to card statements - Mutual funds / equity statements
CXX
- Insurance policy management - Pension plan management - Status on cheque, stop payment on cheque - Ordering cheque books - Balance checking in the account - Recent transactions - Due date of payment (functionality for stop, change and deleting of payments) - PIN provision, Change of PIN and reminder over the Internet - Blocking of (lost, stolen) cards - Locating nearest bank branch, ATMs
2. Payments, deposits, withdrawals, and transfers
- Cash-in, cash-out transactions on an ATM - Domestic and international fund transfers - Micro-payment handling - Mobile & Direct to Home package recharging - Purchasing tickets for travel and entertainment - Commercial payment processing - Bill payment processing - Peer to Peer payments (e.g., Pop money , Isis) - Withdrawal at banking agent - Deposit at banking agent
A specific sequence of SMS messages will enable the system to verify if the client has sufficient funds in his or her wallet and authorize a deposit or withdrawal transaction at the agent. When depositing money, the merchant receives cash and the system credits the client's bank account or mobile wallet. In the same way the client can also withdraw money at the merchant: through exchanging sms to provide authorization, the merchant hands the client cash and debits the merchant's account.
CXXI
Kenya's M-PESA mobile banking service, for example, allows customers of the mobile phone operator Safaricom to hold cash balances which are recorded on their SIM cards. Cash may be deposited or withdrawn from M-PESA accounts at Safaricom retail outlets located throughout the country, and may be transferred electronically from person to person as well as used to pay bills to companies. One of the most innovative applications of mobile banking technology is Zidisha , a US-based nonprofits micro lending platform that allows residents of developing countries to raise small business loans from web users worldwide. Zidisha uses mobile banking for loan disbursements and repayments, transferring funds from lenders in the United States to the borrowers in rural Africa using nothing but the internet and mobile phones.
In Côte d'Ivoire, Orange has a commercial offer which allows subscribers to use ATMs to top up their mobile wallet account. Due to very flexible and modular sicap software, it is easy to add future options such as the payment of utility bills or insurance premium.
3. Investments
Portfolio management services Real-time stock quotes Personalized alerts and notifications on security prices
4. Support
Status of requests for credit, including mortgage approval, and insurance coverage Check (cheque) book and card requests Exchange of data messages and email, including complaint submission and tracking
CXXII
ATM Location
5. Content services
General information such as weather updates, news Loyalty-related offers Location-based services A report by the US Federal Reserve (March 2012) found that 21 percent of mobile phone owners had used mobile banking in the past 12 months. Based on a survey conducted by Forrester, mobile banking will be attractive mainly to the younger, more "tech-savvy" customer segment. A third of mobile phone users say that they may consider performing some kind of financial transaction through their mobile phone. But most of the users are interested in performing basic transactions such as querying for account balance and making bill payment.
6. Future functionalities in mobile banking
Based on the 'International Review of Business Research Papers' from World business Institute, Australia, following are the key functional trends possible in world of Mobile Banking.
With the advent of technology and increasing use of smart phone and tablet based devices, the use of Mobile Banking functionality would enable customer connect across entire customer life cycle much comprehensively than before. With this scenario, current mobile banking objectives of say building relationships, reducing cost, achieving new revenue stream will transform to enable new objectives targeting higher level goals such as building brand of the banking organization. Emerging technology and functionalities would enable to create new ways of lead generation, prospecting as well as developing deep customer relationship and mobile banking world would achieve superior customer experience with bi-directional communications.
CXXIII
Illustration of objective based functionality enrichment In Mobile Banking • Communication enrichment: - Video Interaction with agents, advisors. • Pervasive Transactions capabilities: - Comprehensive “Mobile wallet” • Customer Education: - “Test drive” for demos of banking services • Connect with new customer segment: - Connect with Gen Y – Gen Z using games and social network ambushed to surrogate bank’s offerings • Content monetization: - Micro level revenue themes such as music, e-book download • Vertical positioning: - Positioning offerings over mobile banking specific industries • Horizontal positioning: - Positioning offerings over mobile banking across all the industries • Personalization of corporate banking services: - Personalization experience for multiple roles and hierarchies in corporate banking as against the vanilla based segment based enhancements in the current context. • Build Brand: - Built the bank’s brand while enhancing the “Mobile real estate”.
C) Challenges for a mobile banking solution
1. Handset operability
There are a large number of different mobile phone devices and it is a big challenge for banks to offer mobile banking solution on any type of device. Some of these devices support Java ME and others support SIM Application Toolkit , a WAP browser, or only SMS . Initial interoperability issues however have
CXXIV been localized, with countries like India using portals like R- World to enable the limitations of low end java based phones, while focus on areas such as South Africa have defaulted to the USSD as a basis of communication achievable with any phone.
The desire for interoperability is largely dependent on the banks themselves, where installed applications (Java based or native) provide better security, are easier to use and allow development of more complex capabilities similar to those of internet banking while SMS can provide the basics but becomes difficult to operate with more complex transactions.
There is a myth that there is a challenge of interoperability between mobile banking applications due to perceived lack of common technology standards for mobile banking. In practice it is too early in the service lifecycle for interoperability to be addressed within an individual country, as very few countries have more than one mobile banking service provider. In practice, banking interfaces are well defined and money movements between banks follow the IS0-8583 standard. As mobile banking matures, money movements between service providers will naturally adopt the same standards as in the banking world.
On January 2009, Mobile Marketing Association (MMA) Banking Sub-Committee, chaired by Cell Trust and VeriSign Inc., published the Mobile Banking Overview for financial institutions in which it discussed the advantages and disadvantages of Mobile Channel Platforms such as Short Message Services ( SMS ), Mobile Web, Mobile Client Applications, SMS with Mobile Web and Secure SMS.
2. Security
Security of financial transactions, being executed from some remote location and transmission of financial information over the air, are the most complicated challenges that need to be
CXXV addressed jointly by mobile application developers, wireless network service providers and the banks' IT departments. The following aspects need to be addressed to offer a secure infrastructure for financial transaction over wireless network: 1. Physical part of the hand-held device. If the bank is offering smart-card based security, the physical security of the device is more important. 2. Security of any thick-client application running on the device. In case the device is stolen, the hacker should require at least an ID/Password to access the application. 3. Authentication of the device with service provider before initiating a transaction. This would ensure that unauthorized devices are not connected to perform financial transactions. 4. User ID / Password authentication of bank’s customer. 5. Encryption of the data being transmitted over the air. 6. Encryption of the data that will be stored in device for later / off-line analysis by the customer.
3. Scalability and reliability
Another challenge for the CIOs and CTOs of the banks is to scale-up the mobile banking infrastructure to handle exponential growth of the customer base. With mobile banking, the customer may be sitting in any part of the world (true anytime, anywhere banking) and hence banks need to ensure that the systems are up and running in a true 24 x 7 fashion. As customers will find mobile banking more and more useful, their expectations from the solution will increase. Banks unable to meet the performance and reliability expectations may lose customer confidence. There are systems such as Mobile Transaction Platform which allow quick and secure mobile enabling of various banking services. Recently in India there has been a phenomenal growth in the use of Mobile Banking applications, with leading
CXXVI banks adopting Mobile Transaction Platform and the Central Bank publishing guidelines for mobile banking operations.
4. Application distribution
Due to the nature of the connectivity between bank and its customers, it would be impractical to expect customers to regularly visit banks or connect to a web site for regular upgrade of their mobile banking application. It will be expected that the mobile application itself check the upgrades and updates and download necessary patches (so called "Over the Air" updates). However, there could be many issues to implement this approach such as upgrade / synchronization of other dependent components.
5. Personalization
It would be expected from the mobile application to support personalization such as:
Preferred Language Date / Time format Amount format Default transactions Standard Beneficiary list Alerts
D) Mobile banking in the world
Mobile banking is used in many parts of the world with little or no infrastructure, especially remote and rural areas. This aspect of mobile commerce is also popular in countries where most of their population is unbanked . In most of these places, banks can only be found in big cities, and customers have to travel hundreds of miles to the nearest bank.
CXXVII
In Iran, banks such as Parsian , Tejarat , Mellat , Saderat, Sepah , Edbi, and Bankmelli offer the service. Banco Industrial provides the service in Guatemala. Citizens of Mexico can access mobile banking with Omnilife, Bancomer and MPower Venture. Kenya 's Safaricom (part of the Vodafone Group ) has the M-Pesa Service, which is mainly used to transfer limited amounts of money, but increasingly used to pay utility bills as well. In 2009, Zain launched their own mobile money transfer business, known as ZAP, in Kenya and other African countries. In Somalia , the many telecom companies provide mobile banking, the most prominent being Hormuud Telecom and its ZAAD service.
Telenor Pakistan has also launched a mobile banking solution, in coordination with Taameer Bank, under the label Easy Paisa, which was begun in Q4 2009. Eko India Financial Services , the business correspondent of State Bank of India (SBI) and ICICI Bank , provides bank accounts, deposit, withdrawal and remittance services, micro-insurance , and micro-finance facilities to its customers (nearly 80% of whom are migrants or the unbanked section of the population) through mobile banking. In a year of 2010, mobile banking users soared over 100 percent in Kenya , China , Brazil and USA with 200 percent, 150 percent, 110 percent and 100 percent respectively.
Dutch Bangla Bank launched the very first mobile banking service in Bangladesh on 31 March 2011. This service is launched with ‘Agent’ and ‘Network’ support from mobile operators, Banglalink and City cell . Sybase 365 , a subsidiary of Sybase, Inc . Has provided software solution with their local partner Neurosoft Technologies Ltd. There are around 160 million people in Bangladesh, of which, only 13 per cent have bank accounts. With this solution, Dutch-Bangla Bank can now reach out to the rural and unbanked population, of which, 45 per cent are mobile phone users. Under the service, any mobile handset with subscription to any of the six existing mobile operators of Bangladesh would be able to utilize the service. Under the mobile banking services,
CXXVIII bank-nominated ‘Agents’ perform banking activities on behalf of the banks, like opening mobile banking account, providing cash services (receipts and payments) and dealing with small credits. Cash withdrawal from a mobile account can also be done from an ATM validating each transaction by ‘mobile phone & PIN’ instead of ‘card & PIN’. Other services that are being delivered through mobile banking system are person-to-person (e.g. fund transfer), person-to-business (e.g. merchant payment, utility bill payment), business-to-person (e.g. salary/commission disbursement), government-to-person (disbursement of government allowance) transactions.
5.4 TELEPHONE BANKING
Telephone banking is a service provided by a financial institution , that enables customers of the financial institution to perform financial transactions over the telephone, without the need to visit a bank branch or automated teller machine . Telephone banking times can be longer than branch opening times, and some financial institutions offer the service on a 24 hour basis. From the bank's point of view, telephone banking reduces the cost of handling transactions by reducing the need for customers to visit a bank branch for non-cash withdrawal and deposit transactions.
To use a financial institution's telephone banking facility, a customer must first register with the institution for the service, and set up some password (under various names) for customer verification. The password for telephone banking is normally not the same as for online banking . Financial institutions now routinely allocate customer numbers (also under various names), whether or not customers intend to access their telephone or online banking facility. Customer numbers are normally not the same as account numbers, because a number of accounts can be linked to the one customer number. Customer numbers are also not the same as any card number which may have been issued to the customer by the financial institution. The customer will link to
CXXIX the customer number any of those accounts which the customer controls, which may be cheque, savings, loan, credit card and other accounts. Some financial institutions have restrictions on which accounts may be access via telephone banking. To access telephone banking, the customer would call the special phone number set up by the financial institution, and enter on the keypad the customer number and password . Some financial institutions have set up additional security steps for access, but there is no consistency to the approach adopted. Most telephone banking services use an automated phone answering system with phone keypad response or voice recognition capability . To ensure security, the customer must first authenticate through a numeric or verbal password or through security questions asked by a live representative.
The types of financial transactions which a customer may transact through telephone banking include obtaining account balances and list of latest transactions, electronic bill payments , and funds transfers between a customer's or another's accounts . Cash withdrawals and deposits require the customer to visit an automated teller machine or bank branch. A customer may not be able to use telephone banking on particular bank accounts with a financial institution, such as loan accounts , but bank rules vary in this respect.
It helps to conduct a wide range of banking transactions from the comfort of one’s home or office. Using phone banking facility one can: a. Check Balance b. Check last three transactions. c. Request for a cheque book. d. Transfer funds. e. Enquire on a cheque status, and much more.
CXXX
5.5 ONLINE BANKING
Online banking (or Internet banking or E-banking) allows customers of a financial institution to conduct financial transactions on a secure website operated by the institution, which can be a retail or virtual bank , credit union or building society . To access a financial institution's online banking facility, a customer having personal Internet access must register with the institution for the service, and set up some password (under various names) for customer verification. The password for online banking is normally not the same as for telephone banking . Financial institutions now routinely allocate customer numbers (also under various names), whether or not customers intend to access their online banking facility. Customer numbers are normally not the same as account numbers, because a number of accounts can be linked to the one customer number. The customer will link to the customer number any of those accounts which the customer controls, which may be cheque, savings, loan, credit card and other accounts. Customer numbers will also not be the same as any debit or credit card issued by the financial institution to the customer.
To access online banking, the customer would go to the financial institution's website, and enter the online banking facility using the customer number and password. Some financial institutions have set up additional security steps for access, but there is no consistency to the approach adopted.
FEATURES OF ONLINE BANKING
Online banking facilities offered by various financial institutions have many features and capabilities in common, but also have some that are application specific. The common features fall broadly into several categories • A bank customer can perform some non-transactional tasks through online banking, including -
CXXXI o viewing account balances o viewing recent transactions o downloading bank statements , for example in PDF format o viewing images of paid cheques o ordering cheque books o download periodic account statements o Downloading applications for M-banking, E-banking etc.
• Bank customers can transact banking tasks through online banking, including - o Funds transfers between the customer's linked accounts o Paying third parties, including bill payments (see, e.g., BPAY ) and telegraphic/wire transfers o Investment purchase or sale o Loan applications and transactions, such as repayments of enrolments o Register utility billers and make bill payments • Financial institution administration • Management of multiple users having varying levels of authority • Transaction approval process.
Some financial institutions offer unique Internet banking services, for example
• Personal financial management support, such as importing data into personal accounting software . Some online banking platforms support account aggregation to allow the customers to monitor all of their accounts in one place whether they are with their main bank or with other institutions.
SECURITY OF ONLINE BANKING
CXXXII
Security of a customer's financial information is very important, without which online banking could not operate. Financial institutions have set up various security processes to reduce the risk of unauthorised online access to a customer's records, but there is no consistency to the various approaches adopted. The use of a secure website has become almost universally adopted. Though single password authentication is still in use, it by itself is not considered secure enough for online banking in some countries. Basically there are two different security methods in use for online banking.
The PIN /TAN system where the PIN represents a password, used for the login and TANs representing one-time passwords to authenticate transactions. TANs can be distributed in different ways the most popular one is to send a list of TANs to the online banking user by postal letter. The most secure way of using TANs is to generate them by need using a security token . These token generated TANs depend on the time and a unique secret, stored in the security token ( two- factor authentication or 2FA). Usually online banking with PIN/TAN is done via a web browser using SSL secured connections, so that there is no additional encryption needed. Another way to provide TANs to an online banking user is to send the TAN of the current bank transaction to the user's (GSM) mobile phone via SMS. The SMS text usually quotes the transaction amount and details the TAN is only valid for a short period of time. Especially in Germany, Austria and The Netherlands, many banks have adopted this "SMS TAN" service as it is considered very secure. Signature based online banking where all transactions are signed and encrypted digitally. The Keys for the signature generation and encryption can be stored on smartcards or any memory medium, depending on the concrete implementation.
CXXXIII
1. Attacks
Most of the attacks on online banking used today are based on deceiving the user to steal login data and valid TANs. Two well known examples for those attacks are phishing and pharming . Cross-site scripting and key logger /Trojan horses can also be used to steal login information. A method to attack signature based online banking methods is to manipulate the used software in a way, that correct transactions are shown on the screen and faked transactions are signed in the background.
A 2008 U.S. Federal Deposit Insurance Corporation Technology Incident Report, compiled from suspicious activity reports banks file quarterly, lists 536 cases of computer intrusion, with an average loss per incident of $30,000. That adds up to a nearly $16-million loss in the second quarter of 2007. Computer intrusions increased by 150 percent between the first quarter of 2007 and the second. In 80 percent of the cases, the source of the intrusion is unknown but it occurred during online banking, the report states.
The most recent kind of attack is the so-called Man in the Browser attack, where a Trojan horse permits a remote attacker to modify the destination account number and also the amount.
2. Countermeasures
There exist several countermeasures which try to avoid attacks. Digital certificates are used against phishing and pharming, the use of class-3 card readers is a measure to avoid manipulation of transactions by the software in signature based online banking variants. To protect their systems against Trojan horses, users should use virus scanners and be careful with downloaded software or e-mail attachments.
CXXXIV
In 2001 the U.S. Federal Financial Institutions Examination Council issued guidance for multifactor authentication (MFA) and then required to be in place by the end of 2006.
†††††††††††††††
CHAPTER 6
CHANNELS OF BANKING SECTOR IN INIDA- II
CHANNELS OF BANKING SECTOR IN INIDA
6.1 VIDEO BANKING 6.2 VIDEOCONFERENCING 6.3 AUTOMATED ATTENDANT
CXXXV
6.1 VIDEO BANKING
Video banking is a term used for performing banking transactions or professional banking consultations via a remote video connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine ), or via a videoconference enabled bank branch .
Types of Video Banking
1. In-branch
Video banking can be conducted in a traditional banking branch. This form of video banking replaces or partially displaces the traditional banking tellers to a location outside of the main banking branch area. Via the video and audio link, the tellers are able to service the banking customer. The customer in the branch
CXXXVI uses a purpose built machine to process viable Medias such as cheques, cash, or coins.
2. Time Convenience
Video banking can provide professional banking services to bank customers during non-traditional banking hours at convenient times such as in after hours banking branch vestibules that could be open up to 24 hours a day. This gives bank customers the benefit of personal teller service during hours when bank branches are not typically open.
In addition, following Check 21, "cut off" times are typically later for Personal Teller Machines as physical checks do not need to be gathered and collected to be delivered to a separate check processing location. Substitute checks, or digital images of the original check, can be utilized to process the transaction. This can result in the typical 3PM business day "cut off" for a branch being extended well into the evening. This could greatly benefit customers by making their funds available even sooner than visiting a branch teller window.
3. Location Convenience
Video banking can provide professional banking services in non-traditional banking locations such as afterhours banking branch vestibules, grocery stores, office buildings, factories, or educational campuses.
4. Technology Branches
Video banking can enable banks to expand real-time availability of high-value banking consultative services in branches that might not otherwise have access to the banking expertise
CXXXVII
Technology of Video Banking
Graphical Depiction of a Video Banking Transaction System
Example of a genius Technology video banking system that has been customized for a production deployment. Although video banking has many different forms, they all have similar basic components.
(a) Video Connection
Although termed video banking, the video connection is always accompanied by an audio link which ensures the customer and bank representative can communicate clearly with one
CXXXVIII another. The communication link for that video and audio typically requires a high-speed data connection for applications where the tellers are not in the same physical location. Various technologies are employed by the vendors of video banking, but recent advances in audio and video compression make the use of these technologies much more affordable. For an in depth discussion on videoconferencing technologies see wiki videoconferencing article.
(b) Transaction Equipment
Other than the deployment location, one of the major differences between video banking and videoconferencing is the ability to conduct banking transactions and exchange viable Medias such as checks, cash, and coins. Purpose built machines, such as a Personal Teller Machine (PTM), enable both the video / audio link to the customer plus the ability to accept and dispense viable Medias. The system typically allows the bank teller to manipulate the PTM machine to accept or dispense the cash and checks.
Purpose-built transaction equipment is currently available, but in the future these video banking systems will likely leverage existing automated teller machines which will be modified to enable the audio and video communication.
VIDEO BANKING SERVICES
Depending on the type of video banking solution deployed there are numerous types of services that can be offered. In conjunction with transaction hardware video banking can include all of the following types of services.
• Customer authentication • Cash Deposits • Check Deposits
CXXXIX
• Cash Withdrawal • Coin Withdrawals • Check Print • Account Transfers • Bill Payments • Account inquiries • Process New Accounts With all types of video banking the following services are enabled: • Process New Loans • Consult with banking professionals • Process New Accounts • Inquire about banking services
6.2 VIDEOCONFERENCING
(A) (B)
(A) Tandberg T3 high resolution telepresence room in use (2008). (B) Indonesian and U.S. students participating in an educational videoconference (2010).
CXL
Videoconferencing is the conduct of a videoconference (also known as a video conference or video teleconference) by a set of telecommunication technologies which allow two or more locations to communicate by simultaneous two-way video and audio transmissions. It has also been called 'visual collaboration' and is a type of groupware. Videoconferencing differs from videophone calls in that it's designed to serve a conference or multiple locations rather than individuals. It is an intermediate form of video telephony , first deployed commercially in the United States by AT&T Corporation during the early 1970s as part of their development of Picture phone technology.
With the introduction of relatively low cost, high capacity broadband telecommunication services in the late 1990s, coupled with powerful computing processors and video compression techniques, videoconferencing usage has made significant inroads in business, education, medicine and media. Like all long distance communications technologies (such as phone and Internet), by reducing the need to travel to bring people together the technology also contributes to reductions in carbon emissions, thereby helping to reduce global warming.
TECHNOLOGY.
(A) (B)
(A) Dual display : An older Polycom VSX 7000 system and camera used for videoconferencing, with two displays for simultaneous broadcast from separate locations (2008).
CXLI
(B) Various components and the camera of a Life Size Communications Room 220 high definition multipoint system (2010).
The core technology used in a videoconferencing system is digital compression of audio and video streams in real time. The hardware or software that performs compression is called a codec (coder/decoder). Compression rates of up to 1:500 can be achieved. The resulting digital stream of 1s and 0s is subdivided into labeled packets , which are then transmitted through a digital network of some kind (usually ISDN or IP ). The use of audio modems in the transmission line allow for the use of POTS , or the Plain Old Telephone System, in some low-speed applications, such as video telephony , because they convert the digital pulses to/from analogue waves in the audio spectrum range.
The other components required for a videoconferencing system include:
• Video input : video camera or webcam • Video output : computer monitor , television or projector • Audio input : microphones , CD/DVD player, cassette player, or any other source of Preamp audio outlet. • Audio output : usually loudspeakers associated with the display device or telephone • Data transfer : antilog or digital telephone network, LAN or Internet • Computer : a data processing unit that ties together the other components, does the compressing and decompressing, and initiates and maintains the data linkage via the network.
There are basically two kinds of videoconferencing systems:
CXLII
1. Dedicated systems have all required components packaged into a single piece of equipment, usually a console with a high quality remote controlled video camera. These cameras can be controlled at a distance to pan left and right, tilt up and down, and zoom. They became known as PTZ cameras. The console contains all electrical interfaces, the control computer, and the software or hardware-based codec. Omni directional microphones are connected to the console, as well as a TV monitor with loudspeakers and/or a video projector . There are several types of dedicated videoconferencing devices:
1. Large group videoconferencing is non-portable, large, more expensive devices used for large rooms and auditoriums. 2. Small group videoconferencing is non-portable or portable, smaller, less expensive devices used for small meeting rooms. 3. Individual videoconferencing are usually portable devices, meant for single users, have fixed cameras, microphones and loudspeakers integrated into the console. 2. Desktop systems are add-ons (hardware boards, usually) to normal PCs, transforming them into videoconferencing devices. A range of different cameras and microphones can be used with the board, which contains the necessary codec and transmission interfaces. Most of the desktops systems work with the H.323 standard. Videoconferences carried out via dispersed PCs are also known as e-meetings. a) Conferencing layers
The components within a Conferencing System can be divided up into several different layers: User Interface, Conference Control, Control or Signal Plane, and Media Plane. Videoconferencing User Interfaces (VUI) can be either be graphical or voice responsive. Many in the industry have encountered both types of interfaces, and normally graphical interfaces are encountered on a computer. User interfaces for
CXLIII conferencing have a number of different uses they can be used for scheduling, setup, and making a video call. Through the user interface the administrator is able to control the other three layers of the system.
Conference Control performs resource allocation, management and routing. This layer along with the User Interface creates meetings (scheduled or unscheduled) or adds and removes participants from a conference. Control (Signalling) Plane contains the stacks that signal different endpoints to create a call and/or a conference. Signals can be, but aren’t limited to, H.323 and Session Initiation Protocol (SIP) Protocols. These signals control incoming and outgoing connections as well as session parameters.
The Media Plane controls the audio and video mixing and streaming. This layer manages Real-Time Transport Protocols, User Datagram Packets (UDP) and Real-Time Transport Control Protocol (RTCP). The RTP and UDP normally carry information such the payload type which is the type of codec, frame rate, video size and many others. RTCP on the other hand acts as a quality control Protocol for detecting errors during streaming. b) Multipoint videoconferencing
Simultaneous videoconferencing among three or more remote points is possible by means of a Multipoint Control Unit (MCU). This is a bridge that interconnects calls from several sources (in a similar way to the audio conference call). All parties call the MCU, or the MCU can also call the parties which are going to participate, in sequence. There are MCU bridges for IP and ISDN-based videoconferencing. There are MCUs which are pure software, and others which are a combination of hardware and software. An MCU is characterised according to the number of simultaneous calls it can handle, its ability to conduct transposing of data rates and protocols, and features such as Continuous Presence, in which multiple parties can be seen on-
CXLIV screen at once. MCUs can be stand-alone hardware devices, or they can be embedded into dedicated videoconferencing units.
The MCU consists of two logical components: 1. A single multipoint controller (MC), and 2. Multipoint Processors (MP) sometimes referred to as the mixer.
The MC controls the conferencing while it is active on the signalling plane, which is simply where the system manages conferencing creation, endpoint signalling and in-conferencing controls. This component negotiates parameters with every endpoint in the network and controls conferencing resources while the MC controls resources and signalling negotiations, the MP operates on the media plane and receives media from each endpoint. The MP generates output streams from each endpoint and redirects the information to other endpoints in the conference.
Some systems are capable of multipoint conferencing with no MCU, stand-alone, embedded or otherwise. These use a standards-based H.323 technique known as "decentralized multipoint", where each station in a multipoint call exchanges video and audio directly with the other stations with no central "manager" or other bottleneck. The advantages of this technique are that the video and audio will generally be of higher quality because they don't have to be relayed through a central point. Also, users can make ad-hoc multipoint calls without any concern for the availability or control of an MCU. This added convenience and quality comes at the expense of some increased network bandwidth, because every station must transmit to every other station directly. c) Videoconferencing modes
CXLV
Videoconferencing systems use several common operating modes:
1. Voice-Activated Switch (VAS) 2. Continuous Presence.
In VAS mode, the MCU switches which endpoint can be seen by the other endpoints by the levels of one’s voice. If there are four people in a conference, the only one that will be seen in the conference is the site which is talking; the location with the loudest voice will be seen by the other participants.
Continuous Presence mode displays multiple participants at the same time. The MP in this mode takes the streams from the different endpoints and puts them all together into a single video image. In this mode, the MCU normally sends the same type of images to all participants. Typically these types of images are called “layouts” and can vary depending on the number of participants in a conference. d) Echo cancellation
A fundamental feature of professional videoconferencing systems is Acoustic Echo Cancellation (AEC). Echo can be defined as the reflected source wave interference with new wave created by source. AEC is an algorithm which is able to detect when sounds or utterances reenter the audio input of the videoconferencing codec, which came from the audio output of the same system, after some time delay . If unchecked, this can lead to several problems including:
1. the remote party hearing their own voice coming back at them (usually significantly delayed) 2. strong reverberation , which makes the voice channel useless, and
CXLVI
3. Howling created by feedback. Echo cancellation is a processor-intensive task that usually works over a narrow range of sound delays.
TECHNICAL AND OTHER ISSUES
Computer security experts have shown that poorly configured or inadequately supervised videoconferencing system can permit an easy 'virtual' entry by computer hackers and criminals into company premises and corporate boardrooms, via their own videoconferencing systems. Some observers argue that three outstanding issues have prevented videoconferencing from becoming a standard form of communication, despite the ubiquity of videoconferencing-capable systems. These issues are:
1. Eye contact:
Eye contact plays a large role in conversational turn- taking, perceived attention and intent, and other aspects of group communication. While traditional telephone conversations give no eye contact cues, many videoconferencing systems are arguably worse in that they provide an incorrect impression that the remote interlocutor is avoiding eye contact. Some telepresence systems have cameras located in the screens that reduce the amount of parallax observed by the users. This issue is also being addressed through research that generates a synthetic image with eye contact using stereo reconstruction.
Telcordia Technologies , formerly Bell Communications Research, owns a patent for eye-to-eye videoconferencing using rear projection screens with the video camera behind it, evolved from a 1960s U.S. military system that provided videoconferencing services between the White House and various
CXLVII other government and military facilities. This technique eliminates the need for special cameras or image processing.
2. Appearance consciousness:
A second psychological problem with videoconferencing is being on camera, with the video stream possibly even being recorded. The burden of presenting an acceptable on-screen appearance is not present in audio-only communication. Early studies by Alphonse Chapanis found that the addition of video actually impaired communication, possibly because of the consciousness of being on camera.
3. Signal latency
The information transport of digital signals in many steps needs time. In a telecommunicated conversation, an increased latency (time lag) larger than about 150–300 ms becomes noticeable and is soon observed as unnatural and distracting. Therefore, next to a stable large bandwidth, a small total round- trip time is another major technical requirement for the communication channel for interactive videoconferencing. The issue of eye-contact may be solved with advancing technology, and presumably the issue of appearance consciousness will fade as people become accustomed to videoconferencing.
STANDARDS
CXLVIII
The Tandberg E20 is an example of a SIP -only device. Such devices need to route calls through a Video Communication Server to be able to reach H.323 systems, a process known as "interworking" (2009).
The International Telecommunications Union (ITU) (formerly: Consultative Committee on International Telegraphy and Telephony (CCITT)) has three umbrellas of standards for videoconferencing:
A. ITU H.320 is known as the standard for public switched telephone networks (PSTN) or videoconferencing over integrated services digital networks. While still prevalent in Europe, ISDN was never widely adopted in the United States and Canada. B. ITU H.264 Scalable Video Coding (SVC) is a compression standard that enables videoconferencing systems to achieve highly error resilient Internet Protocol (IP) video transmissions over the public Internet without quality-of-service enhanced lines. This standard has enabled wide scale deployment of high definition desktop videoconferencing and made possible new architectures, which reduces latency between the transmitting sources and receivers, resulting in more fluid communication without pauses. In addition, an attractive factor for IP videoconferencing is that it is easier to set-up for use along with web conferencing and data collaboration . These combined technologies enable users to have a richer multimedia environment for live meetings, collaboration and presentations. C. ITU V.80 : videoconferencing is generally compatibilized with H.324 standard point-to-point video telephony over regular plain old telephone service (POTS) phone lines.
The Unified Communications Interoperability Forum (UCIF), a non-profit alliance between communications vendors, launched in May 2010. The organization's vision is to maximize
CXLIX the interoperability of UC based on existing standards. Founding members of UCIF include HP , Microsoft , Polycom , Logitech /Life-size and Juniper Networks .
SOCIAL AND INSTITUTIONAL IMPACT a) Impact on the general public
High speed Internet connectivity has become more widely available at a reasonable cost and the cost of video capture and display technology has decreased. Consequently, personal videoconferencing systems based on a webcam, personal computer system, software compression and broadband Internet connectivity have become affordable to the general public. Also, the hardware used for this technology has continued to improve in quality, and prices have dropped dramatically. The availability of freeware (often as part of chat programs ) has made software based videoconferencing accessible to many.
For over a century, futurists have envisioned a future where telephone conversations will take place as actual face-to- face encounters with video as well as audio. Sometimes it is simply not possible or practical to have face-to-face meetings with two or more people. Sometimes a telephone conversation or conference call is adequate. Other times, e-mail exchanges are adequate. However, videoconferencing adds another possible alternative, and can be considered when:
a live conversation is needed non-verbal (visual) information is an important component of the conversation; the parties of the conversation can't physically come to the same location; or The expense or time of travel is a consideration.
CL
Deaf, hard-of-hearing and mute individuals have a particular interest in the development of affordable high-quality videoconferencing as a means of communicating with each other in sign language . Unlike Video Relay Service , which is intended to support communication between a caller using sign language and another party using spoken language, videoconferencing can be used directly between two deaf signers.
Mass adoption and use of videoconferencing is still relatively low, with the following often claimed as causes:
1. Complexity of systems. Most users are not technical and want a simple interface. In hardware systems an unplugged cord or a flat battery in a remote control is seen as failure, contributing to perceived unreliability which drives users back to traditional meetings. Successful systems are backed by support teams who can pro-actively support and provide fast assistance when required. 2. Perceived lack of interoperability: not all systems can readily interconnect, for example ISDN and IP systems require a gateway. Popular software solutions cannot easily connect to hardware systems. Some systems use different standards, features and qualities which can require additional configuration when connecting to dissimilar systems. 3. Bandwidth and quality of service: In some countries it is difficult or expensive to get a high quality connection that is fast enough for good-quality video conferencing. Technologies such as ADSL have limited upload speeds and cannot upload and download simultaneously at full speed. As Internet speeds increase higher quality and high definition video conferencing will become more readily available. 4. Expense of commercial systems: well-designed telepresence systems require specially designed rooms which can cost hundreds of thousands of dollars to fit out their rooms with codecs, integration equipment (such as Multipoint Control Units ), high fidelity sound systems and furniture. Monthly
CLI
charges may also be required for bridging services and high capacity broadband service. 5. Self-consciousness about being on camera: especially for new users or older generations who may prefer less fidelity in their communications. 6. Lack of direct eye contact (as mentioned in Problems ), an issue being circumvented in some higher end systems.
These are some of the reasons many systems are often used for internal corporate use only, as they are less likely to result in lost sales. One alternative to companies lacking dedicated facilities is the rental of videoconferencing-equipped meeting rooms in cities around the world. Clients can book rooms and turn up for the meeting, with all technical aspects being prearranged and support being readily available if needed.
b) Impact on government and law
In the United States, videoconferencing has allowed testimony to be used for an individual who is unable or prefers not to attend the physical legal settings, or would be subjected to severe psychological stress in doing so, however there is a controversy on the use of testimony by foreign or unavailable witnesses via video transmission, regarding the violation of the Confrontation Clause of the Sixth Amendment of the U.S. Constitution. In a military investigation in State of North Carolina , Afghan witnesses have testified via videoconferencing.
In Hall County, Georgia, videoconferencing systems are used for initial court appearances. The systems link jails with court rooms, reducing the expenses and security risks of transporting prisoners to the courtroom.
CLII
The U.S. Social Security Administration (SSA), which oversees the world's largest administrative judicial system under its Office of Disability Adjudication and Review (ODAR), has made extensive use of videoconferencing to conduct hearings at remote locations. In Fiscal Year (FY) 2009, the U.S. Social Security Administration (SSA) conducted 86,320 videoconference hearings, a 55% increase over FY 2008. In August 2010, the SSA opened its fifth and largest videoconferencing-only National Hearing Center (NHC), in St. Louis, Missouri. This continues the SSA's effort to use video hearings as a means to clear its substantial hearing backlog. Since 2007, the SSA has also established NHCs in Albuquerque, New Mexico, Baltimore, Maryland, Falls Church, Virginia, and Chicago, Illinois. c) Impact on education
Videoconferencing provides students with the opportunity to learn by participating in two-way communication forums. Furthermore, teachers and lecturers worldwide can be brought to remote or otherwise isolated educational facilities. Students from diverse communities and backgrounds can come together to learn about one another, although language barriers will continue to persist. Such students are able to explore, communicate, analyze and share information and ideas with one another. Through videoconferencing, students can visit other parts of the world to speak with their peers, and visit museums and educational facilities. Such virtual field trips can provide enriched learning opportunities to students, especially those in geographically isolated locations, and to the economically disadvantaged. Small schools can use these technologies to pool resources and provide courses, such as in foreign languages, which could not otherwise be offered.
A few examples of benefits that videoconferencing can provide in campus environments include:
CLIII
1. faculty members keeping in touch with classes while attending conferences; 2. guest lecturers brought in classes from other institutions 3. researchers collaborating with colleagues at other institutions on a regular basis without loss of time due to travel 4. schools with multiple campuses collaborating and sharing professors 5. schools from two separate nations engaging in cross-cultural exchanges 6. faculty members participating in thesis defences at other institutions 7. administrators on tight schedules collaborating on budget preparation from different parts of campus 8. faculty committee auditioning scholarship candidates; 9. researchers answering questions about grant proposals from agencies or review committees 10. student interviews with an employers in other cities, and 11. Teleseminars . d) Impact on medicine and health
Videoconferencing is a highly useful technology for real- time telemedicine and telenursing applications, such as diagnosis , consulting, transmission of medical images , etc... With videoconferencing, patients may contact nurses and physicians in emergency or routine situations; physicians and other paramedical professionals can discuss cases across large distances. Rural areas can use this technology for diagnostic purposes, thus saving lives and making more efficient use of health care money. For example, a rural medical center in Ohio , United States, used videoconferencing to successfully cut the number of transfers of sick infants to a hospital 70 miles (110 km) away. This had previously cost nearly $10,000 per transfer.
Special peripherals such as microscopes fitted with digital cameras , video endoscopes , medical ultrasound imaging devices,
CLIV horoscopes , etc., can be used in conjunction with videoconferencing equipment to transmit data about a patient. Recent developments in mobile collaboration on hand-held mobile devices have also extended video-conferencing capabilities to locations previously unreachable, such as a remote community, long-term care facility, or a patient's home. e) Impact on sign language communications
A deaf person using a video relay service at his workplace to communicate with a hearing person in London. (Courtesy: Sign Video)
A video relay service (VRS), also known as a 'video interpreting service' (VIS), is a service that allows deaf , hard-of- hearing and speech-impaired (D-HOH-SI) individuals to communicate by videoconferencing (or similar technologies ) with hearing people in real-time, via a sign language interpreter .
A similar video interpreting service called video remote interpreting (VRI) is conducted through a different organization often called a "Video Interpreting Service Provider" (VISP). VRS is a newer form of telecommunication service to the D-HOH-SI community, which had, in the United States, started earlier in 1974 using a non-video technology called telecommunications relay service (TRS).
CLV
One of the first demonstrations of the ability for telecommunications to help sign language users communicate with each other occurred when AT&T 's videophone (trademarked as the "Picture phone") was introduced to the public at the 1964 New York World's Fair –two deaf users were able to communicate freely with each other between the fair and another city. Various universities and other organizations, including British Telecom's Martlesham facility, have also conducted extensive research on signing via video telephony. The use of sign language via video telephony was hampered for many years due to the difficulty of its use over slow analogue copper phone lines , coupled with the high cost of better quality ISDN (data) phone lines .[38] Those factors largely disappeared with the introduction of more efficient video codecs and the advent of lower cost high- speed ISDN data and IP (Internet) services in the 1990s.
VRS services have become well developed nationally in Sweden since 1997 and also in the United States since the first decade of the 2000s. With the exception of Sweden, VRS has been provided in Europe for only a few years since the mid-2000s, and as of 2010 has not been made available in many European Union countries, with most European countries still lacking the legislation or the financing for large-scale VRS services, and to provide the necessary telecommunication equipment to deaf users. Germany and the Nordic countries are among the other leaders in Europe, while the United States is another world leader in the provisioning of VRS services. f) Impact on business
Videoconferencing can enable individuals in distant locations to participate in meetings on short notice, with time and money savings. Technology such as VoIP can be used in conjunction with desktop videoconferencing to enable low-cost face-to-face business meetings without leaving the desk, especially for businesses with widespread offices. The technology is also used for telecommuting , in which employees work from
CLVI home. One research report based on a sampling of 1,800 corporate employees showed that, as of June 2010, 54% of the respondents with access to video conferencing used it “all of the time” or “frequently”. Intel Corporation has used videoconferencing to reduce both costs and environmental impacts of its business operations.
Videoconferencing is also currently being introduced on online networking websites, in order to help businesses form profitable relationships quickly and efficiently without leaving their place of work. This has been leveraged by banks to connect busy banking professionals with customers in various locations using video banking technology.
Videoconferencing on hand-held mobile devices ( mobile collaboration technology) is being used in industries such as manufacturing, energy, healthcare, insurance, government and public safety. Live, visual interaction removes traditional restrictions of distance and time, often in locations previously unreachable, such as a manufacturing plant floor a continent away.
Although videoconferencing has frequently proven its value, research has shown that some non-managerial employees prefer not to use it due to several factors, including anxiety. Some such anxieties can be avoided if managers use the technology as part of the normal course of business.
Researchers also find that attendees of business and medical videoconferences must work harder to interpret information delivered during a conference than they would if they attended face-to-face. They recommend that those coordinating videoconferences make adjustments to their conferencing procedures and equipment. g) Impact on media relations
CLVII
The concept of press videoconferencing was developed in October 2007 by the Pan African Press Association (APPA), a Paris France based non-governmental organization , to allow African journalists to participate in international press conferences on developmental and good governance issues. Press videoconferencing permits international press conferences via videoconferencing over the Internet. Journalists can participate on an international press conference from any location, without leaving their offices or countries. They need only be seated by a computer connected to the Internet in order to ask their questions to the speaker.
In 2004, the International Monetary Fund introduced the Online Media Briefing Center, a password-protected site available only to professional journalists. The site enables the IMF to present press briefings globally and facilitates direct questions to briefers from the press. The site has been copied by other international organizations since its inception. More than 4,000 journalists worldwide are currently registered with the IMF.
6.3 AUTOMATED ATTENDANT
In telephony , an automated attendant (also auto attendant, auto-attendant, auto attendant or AA, or virtual receptionist) allows callers to be automatically transferred to an extension without the intervention of an operator /receptionist ). Many AAs will also offer a simple menu system ("for sales, press 1, for service, press 2, etc.). An auto attendant may also allow a caller to reach a live operator by dialling a number, usually "0". Typically the auto attendant is included in a business's phone system such as a PBX , but some services allow businesses to use an AA without such a system. Modern AA services (which now overlap with more complicated interactive voice response or IVR systems) can route calls to mobile phones , VoIP virtual phones , other AAs/IVRs, or other locations using traditional land-line phones .
CLVIII
i) Feature Description
On a purely technical level it could be argued that an automated attendant is a very simple kind of IVR, however in the telecom industry the terms IVR and Auto Attendant are generally considered distinct. An Automated Attendant serves a very specific purpose (replace live operator and route calls) whereas an IVR can perform all sorts of functions (telephone banking, account inquiries, etc.)An AA will often include a directory which will allow a caller to dial by name in order to find user on a system. There is no standard format to these directories, and they can use combinations of first name, last name, or both.
The following lists common routing steps that are components of an automated attendant (any other routing steps would probably be more suitable to an IVR): Transfer to Extension Transfer to Voicemail Play Message Go To a Sub Menu Repeat Choices
In addition, an Automated Attendant would be expected to have values for the following
'0' - where to go when the caller dials '0' Timeout - what to do if the caller does nothing (usually go to the same place as '0') Default mailbox - where to send calls if '0' is not answered (or is not pointing to a live person) ii) Time-based routing
CLIX
Many auto attendants will have options to allow for time of day routing, as well as weekend and holiday routing. The specifics of these features will depend entirely on the particular automated attendant, but typically there would be a normal greeting and routing steps that would take place during normal business hours, and a different greeting and routing for non- business hours.
†††††††††††††††
BIBLOGRAPHAY
Ahluvaliya, Montek S. (1991), Economic Reforms in India since 1991: Has Gradualism Worked?
Sheth, Neha, ”Banking Reforms in India Problems and Prospects”.
PMRao Ramchandra, “Present Day Banking in India” 1st Edition.
Kaptan, S.S, (2003) “Indian Banking in the Electronic Era” Published by SAROP & SONS, New Delhi.
Desai Vasant, (2005) “Indian Financial System” Himalaya Publishing House.
Tannan, M.L, (2002), “Banking Law and Practice in India”, Indian Law house, Delhi.
CLX
Giuseppe, F and Guido, (2004 ) L. Genoa and the history of finance: A series of firsts? 9 November 2004, (the book can be downloaded at www.giuseppefelloni.it)
Edward Colen, (1992 ),“Athenian Economy and Society: A Banking Perspective” Princeton, NJ Princeton University Press.
Demetriades and Luinted, (1997) “Reports on Trends and Progress of Banking in India- RBI.”
Dr. Bhattacharya, K. M. And Agarwal, O. P. “Basics of Banking and Finance Published by Himalaya Publishing House.
Mukharjee Ananya, (2002) “Corporate Governance Reforms in India” Journal of Business Ethics, Vol-37, May 2002.
Ray Amal, K. (2008) “India`s Social Development in Decade of Reforms: 1990-1991/199-2000” Social Indicator Research, Vol-87, July 2008.
Narendra Jadhav, (1996) “Challenges to Indian Banking Published by Macmillan India Limited.
Dr. Bhattacharyya. M. and Agarwal, O.P. (2006 ), “Basics of Banking and Finance Published by Himalaya Publishing House, Delhi.
Nitin Bhasin, (2006), “ Banking Development in India” (1947-2007), new century Publication, New Delhi.
Satish Munjal (1992),” Banking law and practice” RBSA publishers-sms highway Jaipur-3.
Vasant Desai, (2008), ”Fundamental of the Indian financial System” Himalaya publishing house, New Delhi.
R.K.Uppl,(2009) ,”Banking Sector Reforms a fresh outlook”Mahamaya publishing house, New Delhi.
CLXI
T.M.Bhasin, (2003), ”e-commerce in Indian banking “global network Published, new Delhi.
Dr.farhat Husain, (1986) ,”public sector commercial banking in India “deep and deep publishecations, Delhi.
Dr.P.K.srivastava, (2007) ’Banking theory and practice “Himalaya publishing house, new Delhi
K.N.subrammanya, (1985),” Modern Banking in India” deep and deep publishecations, Delhi.
H.Rajeshekar, (2000), ”commercial banking and finance”Mangal deep Publication, Jaipur
B.P.Gupta, H.R.swami, (2005) ,”Indian banking financial system “Indus valley publications, Jaipur
R.P.Uppal.(2008), Indian banking in the globalised world “New century publications, new Delhi.
Gordon Natarajan, (2009 ), Banking theory, law and practice “Himalaya publishing house, new Delhi.
S. L. N. Simha . History of the Reserve Bank of India, Volume 1: 1935– 1951 .
G. Balachandran . The Reserve Bank of India, 1951–1967 . Oxford University Press. 1998.
A. Vasudevan the Reserve Bank of India, Volume 3: 1967–1981 .
Cecil Kisch : Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj .
JOURNAL AND MAGEZINES
CLXII
Bank management, Knowledge management, Applied economics, Applied Finance, Financial Economics, Financial risk management,
International Journal of Business and Globalisation
International Journal of Bank Marketing
Journal of Banking and Finance.
WEBSITE www.rbi.org.in www.google.com www.moneycontrol.com
Http://en.wikipedia.org/wiki/History of bank http://en.wikipedia.org/wiki/Bank#Types_of_banks http://en.wikipedia.org/wiki/Savings_accoun http://en.wikipedia.org/wiki/Money_market_account http://en.wikipedia.org/wiki/Certificate_of_deposit http://en.wikipedia.org/wiki/Individual_retirement_account http://en.wikipedia.org/wiki/Credit_card http://en.wikipedia.org/wiki/Debit_card http://en.wikipedia.org/wiki/Mortgage http://en.wikipedia.org/wiki/Home_equity_loan http://en.wikipedia.org/wiki/Mutual_fund
CLXIII http://en.wikipedia.org/wiki/ATM_card http://en.wikipedia.org/wiki/Transactional_account#Current_accounts http://en.wikipedia.org/wiki/Branch_%28banking%29 http://en.wikipedia.org/wiki/Call_center http://en.wikipedia.org/wiki/Mobile_banking http://en.wikipedia.org/wiki/Online_banking http://en.wikipedia.org/wiki/Customer_relationship_management http://en.wikipedia.org/wiki/Telephone_banking http://en.wikipedia.org/wiki/Automated_attendant http://en.wikipedia.org/wiki/Video_banking http://en.wikipedia.org/wiki/Video_conference http://www.gktoday.in/2010/04/featured-article-banking-history-of
Http://www.gatewayfor India .com/History/Muslim-history
Http://en.wikipedia.org/wiki/banking-in-India http://en.wikipedia.org/wiki/Bank#History http://en.wikipedia.org/wiki/Banking_regulation http://en.wikipedia.org/wiki/Banking_in_India#Early_history www.rbi.org.in/scripts/publications http://www.scribd.com/doc/5434275/indian-banking-sector http://www.scribd.com/doc/4569884/The-Reserve-Bank-of-India89
CLXIV
http://finance.indiamart.com/investment_in_india/Scheduled_commercial_ banks http://www.sendmoney.org/different type of bank account http://en.wikipedia.org/wiki/Banking_regulation http://en.wikipedia.org/wiki/Banking_in_India#Early_history
†††††††††††††††
CLXV