PROJECT ON

“BANKS AS CONSTITUENT OF PAYMENT SYSTEMS”

PREPARED BY

AMEY KASHINATH KOLHE

ROLL NO:-15

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

SEMISTER-V, YEAR-2010-11

UNDER THE GUIDANCE OF

PROF. BHAVIKA KARKERA

SUBMITTED TO

SHAILENDRA EDUCATION SOCIETY’S

ARTS, SCIENCE, COMMERCE COLLEGE

DAHISAR (E), MUMBAI-400068

(NAAC ACCREDITATED B+)

(AFFILIATED TO UNIVERSITY OF MUMBAI)

1
 ACKNOWLEDGEMENT

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

indirect contribution have helped us in converting my thought into reality

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

preparing this project. We take this opportunity to express my gratitude
towards my PROFESSOR BHAVIKA KARKERA for her encouragement
and guidance to prepare project of “BANKS AS CONSTITUENT OF
PAYMENT SYSTEM” FOR THE THIRD YEAR OF “B.COM
(BANKING AND INSURANCE)” specialization course in
“SHAILENDRA EDUCATION SOCIETY OF ARTS, COMMERCE
AND SCIENCE” (2010-2011)

And, last but not least we would like to express our humble thanks to
‘parents’ and friends especially Yash n Dinesh for their encouragement and
boosting which they have given to us….

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 INDEX

SR. NO. TOPICS PAGE

NO.
1 INTRODUCTION 4-12
2 BANKING, A BUSINESS OF TRUST 13-16
3 CREDIT CREATION 17-39
4 PAYMENT SYSTEMS 40-79
5 FOREX 80-86
6 BANKING CHANNELS 87-88
7 N.E.F.T. & R.T.G.S SERVICES 89-92
8 THE PRINCIPLES 93
9 QUESTIONAIRE
10 CONCLUSION
11 BIBLIOGRAPHY

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 CHAPTER 1

INTRODUCTION

1.1 BACKGROUND
1.2 BANEFITS
1.3 GENERAL OVERVIEW

4
 CHAPTER 1

INTRODUCTION

1.1 BACKGROUND

Reserve Bank of India, after setting up of the Board for Payment and
Settlement Systems in 2005, released a vision document incorporating a
proposal to set up an umbrella institution for all the RETAIL PAYMENT
SYSTEMS in the country. The core objective was to consolidate and
integrate the multiple systems with varying service levels into nation-wide
uniform and standard business process for all retail payment systems. The
other objective was to facilitate an affordable payment mechanism to benefit
the common man across the country and help financial inclusion.

IBA's untiring efforts during the last three years helped turning this
vision a reality. National Payments Corporation of India (NPCI) was
incorporated in December 2008 and the Certificate of Commencement of
Business was issued in April 2009. It has been incorporated as a Section 25
company under Companies Act and is aimed to operate for the benefit of all
the member banks and their customers. The authorized capital has been
pegged at Rs 300 crore and paid up capital is Rs 30 crore so that the
company can create infrastructure of large dimension and operate on high
volume resulting payment services at fraction of the present cost structure.

5
1.2 BENEFITS

Payment systems improve financial transparency, by bringing cash into the

banking system, which would otherwise have been kept out of the system.
Banks can then effectively deploy additional cash flow, thus stimulating
business growth and consumption.

In fact, according to a study by the McKinsey, India ranks No.4 in the

world, in terms of currency in circulation. India’s currency in circulation is
11.8% of GDP against the OECD average of 6.3%. This could be attributed
to the fact that more than half of India’s economic output is produced by
small-scale agriculture and some 44 million household businesses.
Mckinsey estimates that improving the payment systems in India, by fully
moving to electronic systems, could result in an annual savings of close to
$6.3 billion.

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

While substantial strides have been made in the Systemically Important

Payment Systems (SIPS) by the establishment of the Clearing Corporation
of India and the RTGS system, the Retail Payment Systems (RPS) are still
dominated by paper-based cheque clearing processes.

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1.3 GENERAL OVERVIEW

Payment systems in India are comprised of electronic payment systems as

well as paper-based systems and can be segregated into Large Value
Payment Systems and Retail Payment Systems. The large value payment
infrastructure is comprised of the of Real Time Gross Settlement (RTGS)
system, the High Value Clearing system, and the Clearing Corporation of
India Ltd. (CCIL). The retail payment systems include the Magnetic Ink
Character recognition (MICR)/non-MICR Check Clearing, National
Electronic Funds Transfer system (NEFT), Electronic Clearing Service
(ECS), and payment channels like card, internet and mobile phone-based
products. Based on the criteria outlined by the Committee on Payment and
Settlement Systems (CPSS), the the RTGS system and the High Value
Clearing system have been identified by the Reserve Bank of India (RBI),
the country’s central bank, as the Systemically Important Payment Systems
(SIPS) in India.

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

Sector Assessment Program (FSAP) assessed India's payment systems. The
findings of the FSAP were never published, however, a recent (2009) report
by the Committee on Financial Sector Assessment (CFSA) mentions the
FSAP and its conclusions. The 2009 CFSA report states that the FSAP
concluded that "India’s compliance with the core principles was only
partial, particularly with regard to the lack of legal and contracted
framework relevant to the payment and settlement systems, multilateral
netting arrangements used in clearing were not backed by legislation and
real-time finality was not assisted by bankruptcy legislation" (p. 264).
Notably, the statutes did not provide a legal backing for multilateral netting
and there was no legal basis for settlement finality. Also, the system did not
have a law for the regulation and supervision of payment systems. The

7
FSAP also raised concerns for the security of the SIPS in India and for the
amount of risk allowed to system participants. The FSAP opined that “the
introduction of Real Time Gross Settlement (RTGS), which would handle
all large value payments, would greatly enhance compliance, boost
efficiency and lower the risks in the payment system” (p. 264).
The RTGS system was subsequently introduced. Per the 2009 CFSA report,
in order to address the shortcomings, the Payment and Settlement Systems
Act was passed in 2007 which strengthened the legal framework for
payment and settlement systems in the country. The reforms undertaken
since the 2001 FSAP also greatly contributed to the compliance of the
Indian payment systems with international standards, the CFSA report
notes.

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

CFSA in September 2006, with the objective of undertaking a self-
assessment of financial sector stability and development. In this larger
context, the CFSA constituted an Advisory Panel on Institutions and Market
Structure (the Panel) with the mandate to assess, inter alia, the level of
compliance of the SIPS in India with the Core Principles for Systemically
Important Payment Systems (CPSIPS) developed by the CPSS. The
assessment conducted by the Oanel and published by the CFSA in March
2009 concludes that the RTGS System observes six of the ten Core
Principles (CPs), and broadly observes two. Core Principle V is not
applicable to the RTGS system. The other SIPS in the country assessed
against the CPSS' CPSIPS was the High Value Clearing (HVC) system. The
CFSA report notes that the HVC system observes eight CPSIPS, broadly
observes one, and partly observes one. In the case of the RTGS system,
weaknesses were identified in the areas of risk management, security and
operational reliability, and price efficiency. In the case of the High Value

8
Clearing system, weaknesses were noted in the areas of risk management
and timely completion of settlement. As regards to the central bank
responsibilities in overseeing payment systems, the RBI (India's central
bank) observes three and broadly observes one.

Based on the results of the World Bank’s 2008 Global Payment Systems
Survey involving 142 countries, Cirasino and Garcia’s report “Measuring
Payment System Development” published in the same year, evaluates
India’s compliance with four distinct sub components which are broadly
based on the CPSS' CPSIPS. The four components of the Cirasino and
Garcia assessment are the (1) legal and regulatory framework; (2) large-
value payment systems; (3) retail payment systems; and (4) the enabling
environment for the payment system oversight function. The first
component, the legal and regulatory framework, covers CP I and to some
extent CP II. The second component large-value payment systems "is based
on two subcomponents: i) system design and key policy decisions that affect
the safety, soundness and efficiency of the system; and, ii) the actual usage
of the large-value system in terms of the share of the settlement throughput
that flows through the system being rated versus other systems that process
large-value payments" (p. 5). This component addresses some aspects of CP
III through CP X. The third component on retail payment systems is not
discussed in this report because the retail payment systems in India are not
systemically important and therefore fall outside the purview of this
evaluation. The fourth component basically focuses on the Central Bank's
payment system oversight function. The 2008 report by Cirasino and Garcia
concludes that India achieves "medium-low level of development” for
component one; and “medium-high level of development” for components
two and four. However, the information contained in this report, although
informative, does not directly address India’s compliance with the CPSIPS.

9
Also, the World Bank Survey and the Cirasino and Garcia assessment
analyze the legal framework that existed before the Payment and Settlement
Systems Act of 2007 came into effect. As indicated in the World Bank
Survey report of 2008, the then pending Act would substantially improve
the country’s legal and regulatory framework with respect to the payment
and settlement systems.

The 2008 World Bank report notes that the RBI’s payment system oversight
is performed over all systemically important funds transfer systems, and that
it is spelled out in a regulation or policy document. The World Bank
remarks that the oversight function of the RBI will be further formalized
when the Payment and Settlement Systems Bill is enacted into law. As
mentioned earlier, the Payment and Settlement Systems Act was enacted in
2007. Overall, even pending the enactment, the World Bank survey found
the oversight function well-established and performed regularly on an on-
going basis. There is also a specific unit within the RBI responsible for
payment system oversight. Although in a non-formal and ad-hoc manner,
the RBI does cooperate with other relevant authorities through regular
meetings and exchange of views and opinions. Further, a formal National
Payments Council is in place in India. The RBI holds regular informal
meetings with senior levels of stakeholders to discuss strategic issues for the
payment system. The RBI also consults stakeholders on particular
operational issues on a bilateral basis or through creating an ad-hoc task
force or working group. In addition, the RBI consults with the Indian Banks'
Association (IBA) on important issues pertaining to the payment systems
regularly.

The 2008 World Bank report notes in its appendix that legal provisions in
India: (1) recognize bilateral and multilateral netting arrangements; (2)
recognize the set off of mutual claims bilaterally; (3) recognize electronic
10
processing of payments; and (4) provide for the enforceability of security
interests provided under collateral arrangements. The 2008 World Bank
publication noted that India was reforming its legal and regulatory
framework for payment systems. These reforms were aimed at reducing
systemic risk; improving the overall efficiency of the payment system;
meeting the demands of the market, the end users, and the government
institutions to provide better payment and settlement services; and keeping
up with technological innovation.

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

operated by the RBI. Its operations are governed by the RTGS Membership
Regulations of 2004 and RTGS (Membership) Business Operating
Guidelines of 2004. The RTGS System has led to the reduction of
settlement risk in large value payments in the country. The High Value
Clearing system is a paper-based clearing system for large value payments.
This clearing is held at 27 major cities. At 17 centers where the RBI
manages the clearing house, the settlement takes place in the current
accounts maintained by the participating banks with the RBI, while at the
other centers, the settlement banks are commercial banks. In recent years,
there has been a significant increase in both the volume and value of
transactions through the SIPS, with the RTGS system constituting the
largest segment in terms of value of transactions. CCIL was set up (with
some major banks as its core promoters) to upgrade the country’s financial
infrastructure in respect of clearing and settlement of debt instruments and
forex transactions. It currently provides guaranteed settlement facility for
government securities clearing, clearing of Collateralized Borrowing and
Lending Obligations (CBLO) and foreign exchange clearing.

In order to focus attention on the payment and settlement systems, the Board
for Regulation and Supervision of Payment and Settlement Systems (BPSS)
11
was set up on March 10, 2005 as a Committee of the RBI's Central Board. It
is entrusted with the role of prescribing policies relating to the regulation
and supervision of all kinds of payment and settlement systems, setting
standards for existing and future systems, authorizing the payment and
settlement systems and determining the criteria for membership to these
systems, including the continuation, termination and rejection of
membership. The setting up of the BPSS has strengthened the institutional
framework for payment and settlement systems in the country, the 2009
CFSA report notes. Further, the setting up of National Securities Depository
Limited (NSDL) and Central Depository Services (India) Limited (CDSL)
for the capital market settlements and Clearing Corporation of India Ltd.
(CCIL) for government securities, forex and money market settlements has
improved efficiency in market transactions and settlement processes.

12
 CHAPTER 2

BANKING A BUSINESS OF TRUST

2.1 PRINCIPLES OF BANKING

2.1.1 LIQUIDITY

2.1.2 SAFETY

2.1.3 PROFITABILITY

2.1.4 SECRECY

2.1.6 SERVICE QUALITY

13
 CHAPTER 2

BANKING, A BUSINESS OF TRUST

Banks are able to lend a major portion of their deposits, and play the
role of an intermediary and constitute the payment system because of
understanding that banks will honour there commitments to the people. If
this trust is broken for any reason, the banks will not able to survive. This
trust might suffer a setback if the banks are not able to return all the deposits
at all times. Failure of one bank can lead to failure of other banks too
because their role as a constituent of the payment system make them have
substantial dealings with others. Large scale systematic failure can cause a
collapse of the economy itself.

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

principles while conducting a business.

2.1These principles are as follows:

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

to be in business as their main source of income is the spread they
earn on loans. At the same time, they should be in a position to meet
the monetary demands of their customers. Even a single default by a
bank can have serious consequences. Therefore, banks have to
maintain sufficient cash reserves at all times. The more the banks
lend, the more the profit they make, but they have to balance the
opposing needs of profits & liquidity. Benefits cannot afford to
compromise liquidity for profits.

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

how prudent a bank is in their business practices. A bank that is
imprudent to lend to risky business, cannot enjoy the trust of its
14
 customers. Just as liquidity & profitability are related, risk &
profitability too are inversely related. Banks have to find the fine
balance between the two of them to survive in business. After all,
banking is essentially management of risks. The more prudent a bank
is in managing risks, the better will be its image and prospectus of
survival and growth.

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

have sufficient liquidity or it is unsafe. However, their trust is likely
to dwindle more if they consider to be profitable. If a bank incurs
losses or makes only meager profits year after year, the customers are
bound to get perturbed unless of course they have other comforts. In
India, people entertain the feeling that the public sector banks will not
fail because the government as their owners will come to their rescue.
The attitude of the same people to bank in the private sector is very
different. Apart from keeping the trust of the people, banks have to be
profitable to survive in the long run.

 2.1.4 Secrecy: During the course of the business, banks come to know
many details of the finance of the customers. Banks have to maintain
confidentiality of such information as revealing the information to the
wrong persons can adversely affect the customers. For examples, a
competitor of the customers or a journalist may use confidential
financial information to cause loss or damage to the reputation of the
customer. Banks owe a duty to their customers to ensure absolute
secrecy of customer information. A bank that does not take his duty
seriously is not likely to be trusted by its customers.

15
  2.1.5 Service quality: Banking is the transaction intensive business, as
customers have to deal with the banks for almost all the financial
transaction. Since the intensity of interactions is high, customers
would naturally prefer to deal with the banks that make the
interactions pleasant and fast. Poor quality of service in the terms of
errors and delays can seriously erode the confidence of the customers
in the banks because errors and delays in the financial dealings can
result into financial loss apart from causing bitterness. Banks that do
not take their obligations to provide quality service cannot hope to
enjoy the trust and patronage of its customers.

Regulations are good for the economy and the bank. Compliance with
regulatory and statutory requirements is sacrosanct.

16
 CHAPTER 3

CREDIT CREATION

3.1 DEPOSIT SERVICES

3.1.1 CURRENT ACCOUNT

3.1.2 SAVING ACCOUNT

3.1.3 FIXED DEPOSIT ACCOUNT

3.1.4 RECURRING DEPOSIT ACCOUNT

3.2 LOAN & CREDIT SERVICES

3.2.1 RETAIL LOANS

3.2.2 WORKING CAPITAL

3.2.3 PERSONAL OVERDRAFT

3.2.4 BUSINESS / CORPORATE CARD

3.2.5 POST SALE FINANCE OR TRADE FINANCE

17
 CHAPTER 3

Credit Creation

 Deposit Services

Banks accept demand deposits and fixed or time deposits. Demand deposits
are repayable on demand while fixed deposits have a fixed maturity period
and are repayable only after the agreed period. Since demand deposits are
more liquid as compared to fixed deposits, the interest paid on such deposits
is at a low rate or no interest is paid at all. Lower the liquidity, higher is the
rate of interest. Therefore, longer the period of the fixed deposit, higher will
be the interest that is paid.

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

 Current accounts
 Savings bank accounts
 Fixed deposit accounts
 Recurring deposit accounts

 Loan or Credit Services

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

 Retail loans
 Personal overdrafts
 Credit cards
 Business/Corporate credit
 Working capital facilities
 Business card
 Post-sale finance or trade finance

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 3.1.1 Current Accounts

Savings accounts mainly aim at meeting the personal needs of

individuals. Similarly, current accounts [CAs] are meant to meet the
business needs of customers. As prohibited by RBI, no interest is paid on
balances in CAs. Since there is no interest involved in CAs, there is no
restriction on the number of transactions or in the type of customers who are
eligible to open such accounts. Owing to the high transaction costs involved
in CAs, the minimum balance that needs to be maintained in CAs is much
higher as compared to Savings bank account.

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

public enterprises, etc. that have many daily banking transactions. Current
Accounts are cheque operated accounts that are meant neither for the
purpose of earning interest and nor for the purpose of savings. These
accounts are meant only for convenience of business and hence they are
non-interest bearing accounts

Depending upon the nature and number of transactions, banks

associate the minimum balance requirement with the level of service
charges. For instance, an account with a large number of transactions will
attract a higher minimum balance stipulation in order to defray a higher
transaction cost involved.

Banks also provide certain value added services to customers, like

facility of withdrawals from current accounts from anywhere, if the
branches are networked. This facility enables a current account holder to
access his funds from anywhere as per his business needs. At times, certain
limitations may be imposed on the amount and frequency of transactions
through anywhere banking.

19
Normally, banks charge the customers for any for any service rendered
through a correspondent or partner bank locations or delivery channels. In
such kind of services, ceilings are imposed on payment and collections.
Extra charges are applied in case of transactions in excess of the ceiling.
Similarly, certain banks offer to issue DDs and POs free of charge up to a
certain number per month and chargeable above the prescribed limit.

 Services offered for Current Accounts:

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

 Payable at par facility

 Anywhere banking facility within the specified limits
 Cheque collection
 DD/PO issue from base branch or correspondent locations with
ceiling as to amount/ number of DDs/POs free of charge for a period
 Phone and internet banking facility for viewing the account status
 Cheque return, chargeable on per instrument basis
 Cash transactions may contain restrictions as to amount that can be
deposited in a month. All additional deposits are charged.
 Limits may be imposed for withdrawal of cash at base branch.
Charges may vary if the non-base branch is within the same city or
outside
 Practically all other services which are not originally agreed or
exceed the given limits are chargeable. From the foregoing analysis, it
is clear that banks design the product for a particular class of clientele
based on the specific requirements and the cost of rendering such a
service. Banks also decide on the rate chargeable for any service,

20
 based on the minimum balance requirement for a particular account,
the number and nature of transactions.

 Current Account can be opened by:

 An individual who has attained majority.

 Two or more persons in their joint names.
 Sole proprietorship concerns.
 Partnership concerns.
 Hindu Undivided Family (HUF).
 Limited Companies.
 Clubs, Societies.
 Trusts, Executors and Administrators.
 Others - Government and semi Government. Bodies, local authorities
etc.

 Documents Required for Opening Current Account

 2 passport size photographs

 Proof of residence i.e. Passport/driving license/ Telephone /
Electricity Bill/ voters identity card/ Ration card
 Introduction of person from an existing account holder.
 PAN number or Declaration in form no.60 or 61 according to the
Income Tax Act 1961

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 3.1.2 Savings Bank Account

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

bills, school fees, etc. Hence, they require an account that helps them to save
and make regular payments without having to use cash. Also, they would
like to retain some amount in their account as savings for liquidity and earn
some interest on the same. The SB account has been designed in order to
meet such needs of individuals.

The interest rate on these accounts is regulated by the RBI. Presently, the
interest rate on SB account is 3.5 per cent per annum and it is paid every six
months. Interest is calculated depending on the minimum balance in the
account between the 10th and the last day of the month. The account
balance from the 1st to 10th is not considered since it is there will be
maximum inflow through salary and maximum outflow for various regular
payments.

 Services offered for SB Accounts

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

fine tuned to the needs of the customer by offering choice of services which
the customer may frequently need. These services are available free of cost
or at concessional rates depending upon the relationship value of the
customer with the bank.

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

 Cash transactions
 Clearing of local cheques

22
  Debit cards, which can be used at ATMs and Point of Sales [POS]
terminals
 Access to ATMs
 Access to Internet Banking
 Access to phone banking services
 Access to mobile banking services
 Standing instructions for making regular payments
 ECS facility for making regular payments, such as
electricity/telephone bills, and also for receiving dividends, interest
and pension

 Value added services offered for SB account

Banks have designed the SB accounts with enhanced level of services for
individual who maintain larger deposits with the bank. These customers are
classified as High Net worth Individuals or Private banking customers and
are offered value added services mentioned below:

 Home delivery of cash and pick up of cash and cheques from home.
 Anywhere banking
 Larger withdrawals from ATMs
 Withdrawal from ATMs of other banks without payment of any
charge
 Faster response to queries at the Phone banking centre
 Separate counters for faster service
 Dedicated relationship managers

Waiver of service charges for remittances and collection of cheques.

23
 3.1.3 Fixed Deposits

FDs are repayable after the expiry of the specified term varying form 7 days
to 120 months. Hence they are also known as term deposits. However, they
are not as liquid as savings deposits. The rate of interest paid on FDs is
higher than that of savings deposits. Normally, the longer the term of the
deposit, higher is the rate of interest but a bank may offer lower rate of
interest for a longer period if it expects the rate to dip in future.

Interest on FDs is paid after every three months from the date of the deposit.
The customer has the choice to have the interest reinvested in the FD
account. In such a case, the deposit is called cumulative FD or compound
interest deposit. For such type of deposits, interest is paid with the invested
amount on maturity of the deposit at the end of the term. In case the
customer wants interest to be paid every quarter, it is credited to their SB
account or sent to them by cheque. This is nothing but a simple FD.

All types of entities can make FDs and the minimum amount of deposits
specified by various banks varies from Rs. 1000 to Rs. 10000 with
additional deposits in multiples as stipulated in that particular scheme.

Banks are supposed to deduct tax from the interest paid on FDs if the
amount of interest paid to a customer at any branch exceeds Rs. 10000 in a
financial year. This is applicable to both interests payable or reinvested per
customer / per branch.

24
 3.1.4 Recurring Deposits

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

save a fixed amount every month and at the same time earn interest at the
rate applicable to FDs. It is quite similar to making FDs of a fixed amount.
These deposits mature on a specific date in the future along with all the
deposits made each month.

The contract between the customer and the bank is similar to the contract
related to a FD. However, the balances in these deposits cannot be
withdrawn till the date of maturity. Banks do permit premature withdrawals
at a reduced interest applicable to the term ofdeposit but they deduct penalty
for the same. TDS is not applicable to interest paid on RDs. This is a great
attraction for customers since they get interest at FD rates without TDS

25
 3.2.1 Retail Loans

India has emerges as one of the largest and fastest growing economies of the
world during the last decade. The strengthening of the economy in India has
been fuelled by the convergence of several key influences, like growth of
the key economy sectors, liberalization policies of the government, well-
educated work force and the emergence of a middle class population. India,
having the second largest population in the world, is on its way to become
the world's fourth largest economy in a span of 2 decades.

Due to the restrictive regulatory environment and strict policies of the

government of India until the early 1990's the public sector banks and other
scheduled banks were the major lenders. Even with the entry of private
banks, in the initial phase, there was limited competition between the public
sector banks and private banks. Also, the thrust was not on developing the
economy consistently through credit growth. Hence, banks did not feel the
need to foray into the sectors that were under served.

In the current scenario, banks have been thriving on retail lending. The
focus of banks now, is to increase the probable profits while limiting
possible losses. An increase in market penetration brought about a change in
the business environment and in the way banks conducted their business.
There was a change in terms of innovation in products as well as processes
to cater to the demands of the new age customer on one hand and to protect
the bank from multiple risks on the other.

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

residential mortgages, consumer credit cards, automobile and personal
loans, loans against securities, and small business loans.

26
Retail Loans - Characteristics

 These are small size loans

 These loans meet the needs of a large number of customers with well
diversified portfolios
 The target customers are generally individuals or small organizations
 These loans offer standard products to customers. Very rarely a
customer's requirement is customized
 The operations of retail credit are centralized in most of the banks
 Bankers can make quick credit related decisions because of
decentralization
 These loans are designed to cover varied segments of risks
 High volume business
 High number of transactions

Salient features of retail loans

 Types of facilities:

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

onetime requirement of a customer, for a fixed tenure, to be repaid
over a period in installments. To enable customers to meet their
emergency requirements, bankers permit them an overdraft [OD].
This means that bankers allow the customer to withdraw more than
the credit balance in the customer's current account or give a
temporary loan in the current account itself.

27
 Secured/Unsecured facilities:

Secured loans are always secured by an underlying asset against

which funding is extended. This lending is also known as asset based
lending. A specific charge is created against such an asset. This gives
the banker/lender the right to take possession of the asset and sell it to
recover the loan in case of default. Unsecured loans do not have any
underlying security and are purely extended based on the
creditworthiness of the borrower. This is also known as non-asset
based lending.

 Interest:

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

tenure of the loan at that rate which is fixed at the time of granting the
loan. The customer has to pay interest at the contracted rate
irrespective of whether the interest rate in the market goes up or
down. In case of floating rate of interest, the rate at which the interest
is charged on the loan varies from time to time according to the
movement of interest rate in the market.

 Tenure:

The tenure for a loan depends upon the amount of the loan and
repayment capacity of the customer. However, the maximum tenure
permitted depends upon the period over which the asset financed
could depreciate completely.

28
 Loan to Value ratio:

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

value of the asset that is given as a loan. It varies according to the
nature of the asset and also the rate at which the asset is expected to
depreciate or reduce in value.

29
 3.2.2 Working Capital

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

metric and it represents operating liquidity existing for a business. Along
with fixed assets like plant and equipment,working capital is considered to
be a part of operating capital. It is computed as current assets minus current
liabilities. If current assets are less as compared to current liabilities, the
entity has aworking capital deficiency. Working capital deficiency is also
called a working capital deficit.

Working Capital = Current Assets - Current Liabilities

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

liquidity if its assets are not in a position to be readily converted into cash.
Positiveworking capital is needed to ensure that a firm is able to carry on its
operations and that it has adequate funds to satisfy both - the maturing short-
term debt as well as upcoming operational expenses. Management
ofworking capital involves managing inventories, managing accounts
receivable & payable and cash.

Calculation

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

This ration indicates whether a firm has adequate short-term assets for
covering its immediate liabilities. Anything below 1 reflects a negative W/C
(working capital). While anything above 2 indicates that the company is not
investing its excess assets. There exists a general belief that a ratio between
1.2 and 2.0 is sufficient.

30
Current assets and current liabilities comprise of three accounts that are of
special importance. These accounts indicate the areas of the business where
managers have a direct impact:

 accounts receivable (current asset)

 inventory (current assets), and
 accounts payable (current liability)

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

since it represents a short-term claim on current assets and is often secured
by long term assets.General types of short-term debt are lines of credit and
bank loans.

An increase in working capital points out that the business has either
increased current assets (that is received cash, or other current assets) or has
decreased current liabilities, for instance has paid off short-term creditors.

Management of working capital

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

the purpose of management of working capital. These policies intend to
manage the current assets (generally cash and cash equivalents, inventories
and debtors) and the short term financing, such that cash flows and returns
are acceptable.

 Cash management: Identify the cash balance that allows the

business to meet day to day expenses. It reduces cash holding costs.
 Inventory management: Identify the level of inventory that allows
for uninterrupted production but lessens the investment in raw
materials - and also minimizes reordering costs – leading to increased
cash flow.

31
 Debtor's management: Identify the suitable credit policy, i.e. credit
terms by which the customers will get attracted, such that any impact
on the cash flows and the cash conversion cycle shall be offset by
increased revenue and hence Return on Capital (or vice versa)
 Short term financing: Identify the suitable source of financing, on
the basis of the cash conversion cycle: the inventory is preferably
financed by credit granted by the supplier; however, it may be
necessary to make use of a bank loan (or overdraft).

32
 3.2.3 Personal Overdraft

 12.24% p.a. variable interest rate1

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

to control your expenditure while giving you financial flexibility
 Available on Westpac Choice, and Westpac Choice eAccount 2
 Choose your overdraft limit from $250 to $25,000
 No minimum monthly repayments when you spend within your
agreed overdraft amounts 3 
 Pay interest only on the money you use, when fees and charges are
paid on time
 No security required
 Low monthly fees 3.  

A convenient way of making sure you have enough money in your account
at all times.

How you can access your money

 ATM
 EFTPOS
 Telephone Banking
 Online Banking
 Branch
 Cheque
 Automatic payments.

33
Benefit summary

 You only pay interest on the money you use (provided fees and
interest are paid when debited to the account)
 You pay a low establishment fee
 No security required.

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

A NAB Personal Overdraft links to your everyday transaction account to

provide you with extra money, up to an agreed limit, to cover everyday
expenses when there's nothing left in your account. It acts as a safety net
when you have multiple direct debits coming out of your account, when
you're waiting for pay day, if an emergency occurs or simply when a lot of
unexpected bills come through at once.

34
 3.2.4 Business / Corporate Credit

Business entities require financial assistance for the following:

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

computer system & so on.
 Financing current assets such as inventory or stocks of raw materials,
work in progress, finished goods, & also debtors.

The amount required for financing current assets is called working

capital & it is ever changing because the composition of current assets
changes every day. For example, once raw materials are purchased,
additional amounts are needed to convert it to finished goods. This process
may take anything from a few minutes to a few years depending upon the
industry. For example, in a restaurant, the raw materials will be converted to
finished goods in minutes while building a ship may take one to two years.
After it is converted to finished goods, it would be sold & the buyer, who is
also a debtor, may take some time to pay his dues. When the amount is
finally received, it will be used to repay the amount borrowed from the bank
for purchase of raw materials & manufacturing expenses. Immediately,
fresh amounts would have to be borrowed for purchase of raw materials &
the process repeats itself. Since purchases & sales occur continually,
borrowing & repayment also happen continually. Such financial assistance
is given in the following ways:

 Term Loans: funds required for acquiring fixed assets are given as
long-term loans, which are repaid in installments from the profits of
the organization. The period of repayment & periodicity of
installments are fixed, based on the repayment capacity of the
organization, which in turn is based on estimated profits and cash
generation of the organization. As in the case of retail loans,

35
 normally, the borrowing organization is required to contribute a
margin.
 Leasing: another method of financing fixed assets is for the bank to
buy in its own name and rent it or lease it to the organization for the
period of which the cost of it can be recovered. When an asset is
leased, the bank will own it, while, if the organization buys an asset is
with the help of a loan, the asset will be owned by the organization. If
the organization takes a loan it will the interest and installments,
periodically to the bank.

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

will pay the bank lease rentals, periodically. Either way, the bank
recovers the cost plus an interest over the periodically. Either way, the
bank recovers the cost plus an interest over the period of loan or lease.
Lease transactions are entered into to take advantage of tax provisions
and its popularity has waned in India as the tax provisions have been
tightened to prevent tax avoidance.

36
 3.2.5 POST SALE FINANCE OR TRADE FINANCE

Cash credit, packing credit & demand loan facilities are given to
finance working capital requirements for purchase of raw materials. While
organization can use the facilities to finance their requirements over the
entire working capital cycle from purchase of raw materials to recovery of
sale proceeds from debtors. However, for financing the post sale
requirements, more efficient facilities are available. These are more efficient
because repayment can be monitored better & the rate of interest could be
cheaper for the customer.

The various modes of post sale finance are as follows:

 CHEQUE PURCHASE: Cheques issued by purchaser of goods have

to be sent for clearing or collection & this causes delay of one to
several days in getting the funds. Banks agree to lend the amount of
the cheque as soon as the cheque is deposited & the advance is
recovered when the cheques are realized. At the time of giving the
advances itself, the bank will recover the interest for the estimated
time it will take for the cheque to be realized. If it takes longer,
additional interest is recovered from the proceeds of the cheque. This
facility is called cheque purchase.
 BILL PURCHASE: Banks also give advance against documentary
bills for collection & recovering the amount when the draee pays the
amount. In case of a demand bill, the date of which it will be paid is
uncertain. The drawee may pay the bill as soon as it is presented to
him or he may take a few days to do so.
Therefore, as in the case of cheque purchase, interest for the
estimated time for realization of the bill is recovered at the time of
purchase. Additional interest is recovered or excess refunded on

37
 realization of the bill. In case the bill is dishonoured, the amount is
recovered from the customer.
 BILL DISCOUNT: In the case of a Usance Bill, the date of payment
is certain as it becomes payable after a certain number of days after it
is accepted or from the date of the bill. Therefore, the bank is able to
calculate the exact amount of interest due on the bill & recover it
upfront. Interest recovered at the time of advance is called discount.
When money is advanced against a usance bill for collection, it is
called bill discounting. In case of bill purchase also, the interest is
recovered at the time of advance.
 LETTER OF CREDIT: The Bill Collection facility reduces the risk
in trade transactions for both the buyer & the seller. The seller is
certain that the buyer will not get the possession of the goods till he
pays for it & the buyer is certain that as soon as he pays for it, he will
get the goods. The letter will state that if the seller dispatches the
goods according to the conditions, the payment of the bill submitted
by the buyer guaranteed by the bank. Conditions could be quality,
quantity, price & date of dispatch. Such a letter from the buyer’s bank
to the seller, guaranteeing payment of the bill drawn by the seller
provided he has complied with the conditions specified in the letter, is
called a Letter of Credit or LC in short. Therefore LC facility is also
treated as a credit facility by the bank but it is called a Non Fund
Based Facility, as the bank does not advances any funds. A cash
credit or loan is Fund Based Facility.
 BILL NEGOTIATION: When a bill accompanied by the LC is
purchased (Demand Bill) or discounted (Usance Bill), it is called bill
negotiation to distinguish it from bill purchase or discount. When a
bill under LC is negotiated, the risk for the negotiating bank is much
less, as the LC is issuing bank guarantees payment.

38
 GUARANTEE: LCs are guarantees issued by banks on behalf of
buyers to facilitate trade transactions. For other types of transactions,
customers approach banks to issue guarantees on their behalf. Also,
the government may impose a condition that the work should be
completed within two months & if they fail to complete it, they
should pay a penalty. The government may insist that a bank should
guarantee their performance or pay a penalty in case of failure to
perform. There are many more such transactions for which bank
guarantee are insisted.

39
 CHAPTER 4

PAYEMENT SYSTEMS

4.1 PAYMENT SERVICES

4.1.1 CHEQUES

4.1.2 PAY ORDERS

4.1.3 DEMAND DRAFT

4.1.4 DEBIT CARD

4.1.5 CREDIT CARD

4.1.6 MULTICITY CHEQUE

4.1.7 ELECTRONIC FUND TRANSFER

4.2 COLLECTION SERVICES

4.2.1 E.C.S.

4.2.2 CASH MANAGEMENT SERVICE

4.2.3 BILL FOR COLLECTION

40
 4.1.1 CHEQUES

History

The cheque had its origins in the ancient banking system, in which bankers
would issue orders at the request of their customers, to pay money to
identified payees. Such an order was referred to as a bill of exchange. The
use of bills of exchange facilitated trade by eliminating the need for
merchants to carry large quantities of currency (e.g. gold) to purchase goods
and services. A draft is a bill of exchange which is not payable on demand
of the payee. (However, draft in the U.S. Uniform Commercial Code today
means any bill of exchange, whether payable on demand or at a later date; if
payable on demand it is a "demand draft", or if drawn on a financial
institution, a cheque.)

Parts of a cheque based on a UK example

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

for payment
2. payee
3. date of issue
4. amount of currency
5. drawer, the person or entity making the cheque
6. signature of drawer
7. Machine readable routing and account information.

41
 A cheque or check (American English) is a piece of paper (usually)
that orders a payment of money. The person writing the cheque, the drawer,
usually has a chequing account where their money is deposited. The drawer
writes the various details including the money amount, date, and a payee on
the cheque, and signs it, ordering their bank, know as the drawee, to pay this
person or company the amount of money stated.

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

make payments without the need to carry around large amounts of gold and
silver. Paper money also evolved from bills of exchange, and are similar to
cheques in that they are a written order to pay the given amount to whoever
had it in their possession (the "bearer").

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

institution to pay a specific amount of a specific currency from a specified
demand account held in the drawer/depositor's name with that institution.
Both the drawer and payee may be natural persons or legal entities.

Although cheques have been around since at least 9th century, it was during
the 20th century that cheques became a highly popular non-cash method for
making payments and the usage of cheques peaked. By the second half of
the 20th century, as cheque processing became automated, billions were
issued each year with volumes peaking in or around the early 1990s. Since
that time cheque usage has seen significant decline as electronic payment
systems started to replace physical cheques. In a number of countries
cheques have become a marginal payment system or have been phased out
completely.

42
Variations on regular cheques

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

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

Cashier’s cheques and Bank drafts

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

treasurer's cheque, are cheques issued against the funds of a financial
institution rather than an individual account holder. Typically, the term
cashier's cheques are used in the US and banker's drafts are used in the UK.
The mechanism differs slightly from country to country but in general the
bank issuing the cashiers cheque or bankers draft will allocate the funds at
the point the cheque is drawn. This provides a guarantee, save for a failure
of the bank, that it will be honoured. Cashier's cheques are perceived to be
as good as cash but they are still a cheque, a misconception often exploited
by scam artists. A lost or stolen cheque can still stopped like any other
cheque so payment is not completely guaranteed.

Certified cheque

When a certified cheque is drawn, the bank operating the account verifies
there are currently sufficient funds in the drawer's account to honour the
cheque. Those funds are then set aside in the bank's internal account until
the check is cashed or returned by the payee. Thus, a certified check cannot
"bounce", and, in this manner, its liquidity is similar to cash, absent failure
of the bank. The bank indicates this fact by making a notation on the face of
the cheque (technically called an acceptance).

43
Payroll cheque

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

when the use of cheques for paying wages and salaries became rare, the
vocabulary "pay cheque" still remained commonly used to describe the
payment of wages and salaries. Payroll cheques issued by the military to
soldiers, or by some other government entities to their employees,
beneficiants, and creditors, are referred to as warrants.

Warrants

Warrants look like cheques and clear through the banking system like
cheques, but are not drawn against cleared funds in a deposit account. A
cheque differs from a warrant in that the warrant is not necessarily payable
on demand and may not be negotiable.[22] They are often issued by
government entities such as the military to pay wages or supplies. In this
case they are an instruction to the entities treasurer department to pay the
warrant holder on demand or after a specified maturity date.

Travellers cheque

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

unconditional payment to someone else as a result of paying the account
holder for that privilege. Traveller's cheques can usually be replaced if lost
or stolen and people often used to use them on vacation instead of cash as
many businesses used to accept traveller's cheques as currency. The use of
credit or debit cards has, however, begun to replace the traveller's cheque as
the standard for vacation money due to their convenience and additional
security for the retailer. This has resulted in many businesses no longer
accepting traveller's cheques.

44
Money or Postal order

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

by a third party for a customer is referred to as a money order or postal
order. These are paid for in advance when the order is drawn and are
guaranteed by the institution that issues them and can only be paid to the
named third party. This was a common way to send low value payments to
third parties avoiding the risks associated with sending cash via the mail,
prior to the advent of electronic payment methods.

Oversized cheques

Oversized cheques are often used in public events such as donating money
to charity or giving out prizes such as Publishers Clearing House. The
cheques are commonly 18 by 36 inches (46 × 91 cm) in size,[23] however,
according to the Guinness Book of World Records, the largest ever is 12 by
25 meters (39 × 82 ft).[24] Regardless of the size, such cheques can still be
redeemed for their cash value as long as they have the same parts as a
normal cheque, although usually the oversized cheque is kept as a souvenir
and a normal cheque is provided.[25] A bank may levy additional charges for
clearing an oversized cheque.

Payment vouchers

Some public assistance programs such as the Special Supplemental

Nutrition Program for Women, Infants and Children, or Aid to Families
with Dependent Children make vouchers available to their beneficiaries,
which are good up to a certain monetary amount for purchase of grocery
items deemed eligible under the particular programme. The voucher can be
deposited like any other cheque by a participating supermarket or other
approved business.

45
 4.1.2 PAYORDERS

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

specified payee for payment within a local area. Any variations of rate will
be decided by Credit Committee on Remittances products.

Procedure for issuing Bankers cheque or PO

1. Filling up and signing the requisition slip.

2. Paying amount to the counter
3. Cashier will scrutinize your request
4. He will enter transaction in their system by debiting cash in case you
are paying cash and your account in case you are giving a cheque.
5. Next step is printing of PO
6. Printed PO will be sent to Customer service manager along with
requisition slip. The CSM will sign after verification.
7. Two authorities should sign in case of PO above 200000

46
 Features and Benefits of PAYORDERS:
All Banker's Cheques are pre-printed with the crossing "NOT
NEGOTIABLE".
To be issued for use only within the clearing area of the issuing Bank and if
cleared outside the clearing area then the normal outstation cheque
commission is payable.
Should be accepted as good by the payee as it has been paid for by the
customer at time of issue. It cannot be returned except for technical reasons.
To be used by customers who do not have a current account but wish to
make payments by cheques, or in situations when a personal cheque is
unacceptable.
Issued in Malaysian Ringgit only.

47
 4.2.3 DEMAND DRAFT

What Does Demand Draft Mean?

A method used by individuals to make transfer payments from one bank
account to another. Demand drafts are marketed as a relatively secure
method for cashing checks. The major difference between demand drafts
and normal checks is that demand drafts do not require a signature in order
to be cashed.

Also known as "remotely created checks".

Demand drafts were originally designed to benefit legitimate telemarketers

who needed to withdraw funds from customer checking accounts. However,
the lack of a signature required to authorize the transfers have left demand
drafts open to fraudulent use. The only information needed to create a
demand draft is a bank account number and a bank routing number - this
information is found on a standard check.

48
 4.2.4 DEBIT CARD

A debit card (also known as a bank card or check card) is a plastic card
that provides an alternative payment method to cash when making
purchases. Functionally, it can be called an electronic cheque, as the funds
are withdrawn directly from either the bank account, or from the remaining
balance on the card. In some cases, the cards are designed exclusively for
use on the Internet, and so there is no physical card.[1][2]

In many countries the use of debit cards has become so widespread that their
volume of use has overtaken the cheque and, in some instances, cash
transactions. Like credit cards, debit cards are used widely for telephone and
Internet purchases and, unlike credit cards, the funds are transferred
immediately from the bearer's bank account instead of having the bearer pay
back the money at a later date.

Debit cards may also allow for instant withdrawal of cash, acting as the
ATM card for withdrawing cash and as a cheque guarantee card. Merchants
may also offer cashback facilities to customers, where a customer can
withdraw cash along with their purchase.

49
Advantages and Disadvantages

Debit and check cards, as they have become widespread, have revealed
numerous advantages and disadvantages to the consumer and retailer alike.

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

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

Advantages are as follows:

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

impossible to obtain a credit card can more easily obtain a debit card,
allowing him/her to make plastic transactions.

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

writing altogether. Check cards debit funds from the user's account on
the spot, thereby finalizing the transaction at the time of purchase,
and bypassing the requirement to pay a credit card bill at a later date,
or to write an insecure check containing the account holder's personal
information.
 Like credit cards, debit cards are accepted by merchants with less
identification and scrutiny than personal checks, thereby making

50
 transactions quicker and less intrusive. Unlike personal checks,
merchants generally do not believe that a payment via a debit card
may be later dishonored.
 Unlike a credit card, which charges higher fees and interest rates
when a cash advance is obtained, a debit card may be used to obtain
cash from an ATM or a PIN-based transaction at no extra charge,
other than a foreign ATM fee.

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

 Use of a debit card is not usually limited to the existing funds in the
account to which it is linked, most banks allow a certain threshold
over the available bank balance which can cause overdraft fees if the
customer does not depend on their own records of spending.
 Many banks are now charging over-limit fees or non-sufficient funds
fees based upon pre-authorizations, and even attempted but refused
transactions by the merchant (some of which may not even be known
by the client).
 Many merchants mistakenly believe that amounts owed can be
"taken" from a customer's account after a debit card (or number) has
been presented, without agreement as to date, payee name, amount
and currency, thus causing penalty fees for overdrafts, over-the-limit,
amounts not available causing further rejections or overdrafts, and
rejected transactions by some banks.
 In some countries debit cards offer lower levels of security protection
than credit cards. Theft of the users PIN using skimming devices can
be accomplished much easier with a PIN input than with a signature-
based credit transaction. However, theft of users' PIN codes using
skimming devices can be equally easily accomplished with a debit

51
 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. The consumer also has a
shorter time (usually just two days) to report such fraud to the bank in
order to be eligible for such a waiver with a debit card, whereas with
a credit card, this time may be up to 60 days. A thief who obtains or
clones a debit card along with its PIN may be able to clean out the
consumer's bank account, and the consumer will have no recourse.

Consumer Protection

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

MasterCard, for instance, prohibit minimum and maximum purchase sizes,
surcharges, and arbitrary security procedures on the part of merchants.
Merchants are usually charged higher transaction fees for credit
transactions, since debit network transactions are less likely to be
fraudulent. This may lead them to "steer" customers to debit transactions.
Consumers disputing charges may find it easier to do so with a credit card,
since the money will not immediately leave their control. Fraudulent
charges on a debit card can also cause problems with a checking account
because the money is withdrawn immediately and may thus result in an
overdraft or bounced checks. In some cases debit card-issuing banks will
promptly refund any disputed charges until the matter can be settled, and in

52
some jurisdictions the consumer liability for unauthorized charges is the
same for both debit and credit cards.

In some countries, like India and Sweden, the consumer protection is the
same regardless of the network used. Some banks set minimum and
maximum purchase sizes, mostly for online-only cards. However, this has
nothing to do with the card networks, but rather with the bank's judgement
of the person's age and credit records. Any fees that the customers have to
pay to the bank are the same regardless of whether the transaction is
conducted as a credit or as a debit transaction, so there is no advantage for
the customers to choose one transaction mode over another. Shops may add
surcharges to the price of the goods or services in accordance with laws
allowing them to do so. Banks consider the purchases as having been made
at the moment when the card was swiped, regardless of when the purchase
settlement was made. Regardless of which transaction type was used, the
purchase may result in an overdraft because the money is considered to have
left the account at the moment of the card swiping.

53
 4.1.5 CREDIT CARD

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

It allows its holder to buy goods and services based on the holder's promise
to pay for these goods and services.[1] The issuer of the card grants a line of
credit to the consumer (or the user) from which the user can borrow money
for payment to a merchant or as a cash advance to the user. Usage of the
term "credit card" to imply a credit card account is a metonym.

A credit card is different from a charge card: a charge card requires the
balance to be paid in full each month. In contrast, credit cards allow the
consumers a continuing balance of debt, subject to interest being charged.

Security problems and solutions

Credit card security relies on the physical security of the plastic card as well
as the privacy of the credit card number. Therefore, whenever a person other
than the card owner has access to the card or its number, security is
potentially compromised. Once, merchants would often accept credit card
numbers without additional verification for mail order purchases. It's now
common practice to only ship to confirmed addresses as a security measure
to minimise fraudulent purchases. Some merchants will accept a credit card
54
number for in-store purchases, whereupon access to the number allows easy
fraud, but many require the card itself to be present, and require a signature.
A lost or stolen card can be cancelled, and if this is done quickly, will
greatly limit the fraud that can take place in this way. For internet purchases,
there is sometimes the same level of security as for mail order (number
only) hence requiring only that the fraudster take care about collecting the
goods, but often there are additional measures.[citation needed] European banks
can require a cardholder's security PIN be entered for in-person purchases
with the card.

The PCI DSS is the security standard issued by The PCI SSC (Payment
Card Industry Security Standards Council). This data security standard is
used by acquiring banks to impose cardholder data security measures upon
their merchants.

The low security of the credit card system presents countless opportunities
for fraud. This opportunity has created a huge black market in stolen credit
card numbers, which are generally used quickly before the cards are
reported stolen.

The goal of the credit card companies is not to eliminate fraud, but to
"reduce it to manageable levels".[12] This implies that high-cost low-return
fraud prevention measures will not be used if their cost exceeds the potential
gains from fraud reduction - as would be expected from organisations whose
goal is profit maximisation.

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

("friendly fraud"), or carried out by the use of credit card information which
can be stolen in many ways, the simplest being copying information from
retailers, either online or offline. Despite efforts to improve security for

55
remote purchases using credit cards, security breaches are usually the result
of poor practice by merchants. For example, a website that safely uses SSL
to encrypt card data from a client may then email the data, unencrypted,
from the webserver to the merchant; or the merchant may store unencrypted
details in a way that allows them to be accessed over the Internet or by a
rogue employee; unencrypted card details are always a security risk. Even
encryption data may be cracked.

Controlled Payment Numbers which are used by various banks such as

Citibank (Virtual Account Numbers), Discover (Secure Online Account
Numbers, Bank of America (Shop Safe), 5 banks using eCarte Bleue and
CMB's Virtualis in France, and Swedbank of Sweden's eKort product are
another option for protecting against credit card fraud. These are generally
one-time use numbers that front one's actual account (debit/credit) number,
and are generated as one shops on-line. They can be valid for a relatively
short time, for the actual amount of the purchase, or for a price limit set by
the user. Their use can be limited to one merchant. If the number given to
the merchant is compromised, it will be rejected if an attempt is made to use
it again.

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

consumer has a Chip and PIN (EMV) enabled card the card can be limited
so that it be used only at point of sale locations (i.e. restricted from being
used on-line) and only in a given territory (i.e. only for use in Canada). This
technology provides the option for banks to support many other controls too
that can be turned on and off and varied by the credit card owner in real
time as circumstances change (i.e., they can change temporal, numerical,
geographical and many other parameters on their primary and subsidiary
cards). Apart from the obvious benefits of such controls: from a security
perspective this means that a customer can have a Chip and PIN card
56
secured for the real world, and limited for use in the home country. In this
eventuality a thief stealing the details will be prevented from using these
overseas in non chip and pin (EMV) countries. Similarly the real card can
be restricted from use on-line so that stolen details will be declined if this
tried. Then when card users shop online they can use virtual account
numbers. In both circumstances an alert system can be built in notifying a
user that a fraudulent attempt has been made which breaches their
parameters, and can provide data on this in real time. This is the optimal
method of security for credit cards, as it provides very high levels of
security, control and awareness in the real and virtual world. Furthermore it
requires no changes for merchants at all and is attractive to users, merchants
and banks, as it not only detects fraud but prevents it.[citation needed]

Additionally, there are security features present on the physical card itself in
order to prevent counterfeiting. For example, most modern credit cards have
a watermark that will fluoresce under ultraviolet light. A Visa card has a
letter V superimposed over the regular Visa logo and a Mastercard has the
letters MC across the front of the card. Older Visa cards have a bald eagle or
dove across the front. In the aforementioned cases, the security features are
only visible under ultraviolet light and are invisible in normal light. Similar
security features are present in paper currency and certain ID cards in the
United States, as well.[citation needed]

The Federal Bureau of Investigation and U.S. Postal Inspection Service are
responsible for prosecuting criminals who engage in credit card fraud in the
United States, but they do not have the resources to pursue all criminals. In
general, federal officials only prosecute cases exceeding US$5,000. Three
improvements to card security have been introduced to the more common
credit card networks but none has proven to help reduce credit card fraud so
far. First, the on-line verification system used by merchants is being
57
enhanced to require a 4 digit Personal Identification Number (PIN) known
only to the card holder. Second, the cards themselves are being replaced
with similar-looking tamper-resistant smart cards which are intended to
make forgery more difficult. The majority of smart card (IC card) based
credit cards comply with the EMV (Europay MasterCard Visa) standard.
Third, an additional 3 or 4 digit Card Security Code (CSC) is now present
on the back of most cards, for use in card not present transactions.
Stakeholders at all levels in electronic payment have recognized the need to
develop consistent global standards for security that account for and
integrate both current and emerging security technologies. They have begun
to address these needs through organizations such as PCI DSS and the
Secure POS Vendor Alliance.[13]

58
 4.1.6 MULTICITY CHEQUES

"Multi City Cheque" or MCC is a facility wherein the customer can issue
cheques drawn at the base branch and payable at any branch at remote
centre. These cheques will be treated as local cheques at the remote branch.
There will be no collection charges and the credit will be given on the same
day, as applicable to local cheques. Even if the cheque is dropped at any
other bank other than the base bank, there will not be any collection charges.
For example, if you are paid a Multi city cheque by an account holder at a
SBI branch in Delhi and you drop the same at any bank in Mumbai where
you hold an account, then there will not be any collection charges.

Who can avail this facility?

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

holders, Current account holders and COD/ SOD account holders who fulfill
the following eligibility criteria:

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

59
Current accounts with a monthly minimum balance of Rs. 50,000/-

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

Guidelines for availing MCC

Apply for the MCC facility in the prescribed application form available at
all the cluster-connected branches of the Bank.

MCC Cheques cannot be used for withdrawing cash, as they are pre-printed
with A/c Payee Crossing. 

Multi City Cheques are payable at all the cluster linked centres, subject to
the availability of clear balance in the account of the customer, and the
availability of the link between the branches.

What are the charges applicable for MCC?

Transaction Charges: This facility is offered free of any transaction

charges at present.

Cheque Leaf Charges: Rs.5/- per leaf in case of both SB and CD/COD/SOD
accounts. No free cheques would be given. The accounts availing Multi-city
cheque facility can also avail ordinary cheque books.

60
Cheque Bounce Charges: In the incident of a Multi-city cheque bounce due
to financial reasons, Rs.100/- will be charged.

61
 4.1.7 ELECTRONIC FUND TRANSFER

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

used to perform financial transactions electronically. An EFT is the
electronic exchange or transfer of money from one account to another,
either within the same financial institution or across multiple institutions

The term is used for a number of different concepts:

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

payment card
 Direct deposit payroll payments for a business to its employees,
possibly via a payroll services company
 Direct debit payments, sometimes called electronic checks, for which
a business debits the consumer's bank accounts for payment for goods
or services
 Electronic bill payment in online banking, which may be delivered by
EFT or paper check
 Transactions involving stored value of electronic money, possibly in a
private currency
 Wire transfer via an international banking network (generally carries
a higher fee)

62
  Electronic Benefit Transfer

In 1978 U.S. Congress passed the Electronic Funds Transfer Act to establish
the rights and liabilities of consumers as well as the responsibilities of all
participants in EFT activities in the United States.

Defn-

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

centre
designated by that bank to be responsible for processing, sending or
receiving NEFT
SFMS message of that bank in that Centre and to do all other functions
entrusted to
an NEFT Service Centre by or under these Regulations. NEFT Service
Centre is
referred to as "Sending NEFT Service Centre" when it originates an NEFT
SFMS
message for Funds Transfer. NEFT Service Centre is referred to as
"Receiving NEFT
Service Centre" when it receives NEFT SFMS message from NEFT Centre.

INTRODUCTION
1.1 Reserve Bank of India has introduced an electronic funds transfer
system called "The Reserve Bank of India National Electronic Funds
Transfer System" (herein after may be referred to as "NEFT System" or
"System"). A set of procedural guidelines to be followed are detailed in this
document.
63
Objects
1.2 The objects of the NEFT System are:
(1) to establish an Electronic Funds Transfer System to facilitate an
efficient, secure, economical, reliable and expeditious system of funds
transfer and clearing in the banking sector throughout India, and
(2) to relieve the stress on the existing paper based funds transfer and
clearing system.

Coverage
1.3 These guidelines shall apply to participating banks/ and branches in the
system as notified by Reserve Bank of India from time to time on its official
Web-sit

Eligibility criteria
3.1 To be eligible to apply for admission, an applicant
1) shall be a bank.
2) shall be a member of Real Time Gross Settlement System (RTGS)
3) shall have installed SFMS
4) shall meet the other prescribed eligibility criteria/conditions , which are
notified by RBI from time to time
Provided that, all or any of the above conditions may be relaxed or
dispensed with, if
so decided by the Reserve Bank of India.

64
Procedure for Admission
3.2 Any bank or institution eligible to be admitted in the NEFT System may
submit to the Nodal Department, duly authenticated application, containing
full particulars in the form specified at Annexure-I (Form: NEFT-IA). Every
application shall be accompanied by an undertaking in the specified form to
abide by the Procedural
Guidelines in the event of admission.
3. 3 The Nodal Department shall issue Letter of Admission as specified in
Annexure-II (Form: NEFT-IB) to every bank admitted into the NEFT
System.

CONDITIONS OF TRANSFER
1. Remitting Bank shall not be liable for any loss of damage arising or
resulting from delay in transmission delivery or non delivery of Electronic
message or any mistake, omission, or error in transmission or delivery
thereof or in deciphering the message from any cause whatsoever or from its
misinterpretation received or the action of the destination Bank or any act or
even beyond control.
2. All payment instructions should be checked carefully by the remitter.
3. Messages received after cut-off time will be sent in the next batch.

65
 4.2.1 ELECTRONIC CLEARING SERVICES

ECS (Credit Clearing)

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

large number of payments (such as interest / dividend) can directly deposit
the amount into the bank accounts of the share-holders/ depositors/ investors
without having to issue paper instruments.

Bulk and repetitive payments like interest/dividend are mostly paper based
involving printing of warrants (in costly MICR format) , dispatching them
by post (most often by Regd. post) and reconciliation thereof after payment
by the agency banks. The difficulties are-

 It requires an expensive administrative machinery for printing,

dispatch and reconciliation<
 Bunching of a large number of instruments in clearing results in
operational bottlenecks and pressures on the cheque processing
system
 Chances of loss of instruments in transit and their fraudulent
encashment
 The customer has also to keep track of the receipt/non-receipt of the
instrument and take efforts in depositing the instrument to the bank
on receipt of the same;
 Banks find processing of such a large volume of instruments not only
error prone and monotonous, but also a strain on the cheque clearing
system.

66
How does ECS (Credit Clearing ) work ?

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

make payments to a large number of customers/investors would
prepare the payment data on a magnetic media (i.e., tape or floppy)
and submit the same to its banker (Sponsor Bank).
 Step 2 : The Sponsor Bank would present the payment data to the
local Bankers’ Clearing House (managed by Reserve Bank of India at
15 centres and by State Bank of India or Associate banks at other
centres) authorising the Manager of the Clearing House to debit the
Sponsor Bank’s account and credit the accounts (Destination Bank)
of the banks where the beneficiaries of the transactions maintain their
accounts.
 Step 3 : On receiving this authorisation, the Clearing House will
process the data and work out an inter-bank funds settlement.
 Step 4 : The Clearing House will furnish to the service branches of
the destination banks branch-wise credit reports indicating the
beneficiary details such as the names of the branches where the
accounts are maintained, the names of the beneficiaries, account type,
account numbers and the respective amounts.
 Step 5 : The service branches will in turn pass on the advices to the
concerned branches of their bank, which will credit the beneficiaries’
accounts on the appointed date.

How does this Scheme benefit a corporate body / institution?

 Savings in administrative cost presently being incurred for printing of

paper instruments in MICR format and dispatching them by
Registered Post.

67
  Loss of instruments in transit or fraudulent encashment thereof totally
eliminated.
 Reconciliation of transactions is made automatic. By the time the
ECS cycle is completed, the user institution gets an electronic data
file from its bank with the date of payment and banker’s confirmation
thereon.
 Cash management becomes easier as arrangement for funds is
required to be made only on the specified date.
 Ensuring better customer/investor service.
 Paying the way the best companies in the world pay to their share
holders/ investors, customers

How does the Scheme benefit the beneficiary customer ?

 Payment on the due date

 Effortless receipt – No need for visiting the bank for depositing the
dividend/interest warrant.
 Loss of instrument in transit or fraudulent encashment thereof and
consequent correspondence with the company are totally eliminated

ECS (Debit Clearing)

The Reserve Bank of India has introduced the Electronic Clearing

Service(Debit) scheme to provide faster method of effecting periodic and
repetitive payments by ‘direct debit’ to customers’ accounts(duly
authorised) thereby minimising paper transactions and increasing customer
satisfaction. Electronic Clearing Service (Debit) envisages “a large number
of debits and one credit” in the case of collection of electricity bills,
telephone bills, loan installments, insurance premia, Club fees, etc by the
Utility Service Providers.

68
As per the existing system for collection of electricity bills and telephone
bills, the customers/subscribers are required to go to the collection centres
/designated banks and stand in long queues for payment of bills/dues. There
would not be any cash transaction or payment through cheques in the new
system. There is an overall limit of Rs.5,00,000 per transaction. Levy of
service charges by both sponsoring bank and destination bank is now left
entirely to the discretion of respective banks. A sum of Rs.0.50 p. only is
collected by NCC, RBI towards Clearing House charges. Utility service
providers like MTNL, Telephone/Mobile companies, Telecom Departments,
State Electricity Boards, Banks (for collection of credit cards dues) LIC,
Housing Finance Companies, Intermediaries and Clubs etc are making use
of ECS(Debit) Clearing system.

How does ECS(Debit) work?

 Utility Companies, banks/institutions receiving periodic/repetitive

payments towards electricity bills/telephone bills/loan
installments/insurance premia initially collect mandates from their
customers / subscribers for collection of amounts due from them by
direct debit to their accounts with banks. The mandate provides
details such as the name, account number, name of bank/branch etc.
duly certified by the bank concerned.
 Based on the details furnished in the mandates, the user company
prepares transaction data on electronic media and submits the
encrypted data to the local Clearing House, through its Sponsor bank.
 After due validation of the data, the local clearing house processes the
same and arrives at the inter-bank settlement as also generates bank-
wise/branch-wise reports(hard copies)

69
  NCC debits the destination banks’ accounts with clearing house and
simultaneously affords a consolidated credit to the sponsor bank’s
account and furnishes the bank-wise and branch-wise reports to the
service branches of destination banks.
 Service branches forward the branch-wise reports to the respective
branches for debiting the accounts of customers with the indicated
amounts.

Benefits under ECS(Debit)

 Faster Collection of bills by the companies and better cash

management by them
 eliminates the need to go to the collection centres/banks by the
customers and no need to stand in long ‘Q’s for payment
 automatic debiting to the accounts once the mandates are given by the
customers, to that effect cuts down the procedural delay.

70
 4.2.2 CASH MANAGEMENT SERVICES

Cash management services generally offered

The following is a list of services generally offered by banks and utilised by

larger businesses and corporations:

 Account Reconcilement Services: Balancing a checkbook can be a

difficult process for a very large business, since it issues so many
checks it can take a lot of human monitoring to understand which
checks have not cleared and therefore what the company's true
balance is. To address this, banks have developed a system which
allows companies to upload a list of all the checks that they issue on a
daily basis, so that at the end of the month the bank statement will
show not only which checks have cleared, but also which have not.
More recently, banks have used this system to prevent checks from
being fraudulently cashed if they are not on the list, a process known
as positive pay.

 Advanced Web Services: Most banks have an Internet-based system

which is more advanced than the one available to consumers. This
enables managers to create and authorize special internal logon
credentials, allowing employees to send wires and access other cash
management features normally not found on the consumer web site.

 Armored Car Services (Cash Collection Services): Large retailers

who collect a great deal of cash may have the bank pick this cash up
via an armored car company, instead of asking its employees to
deposit the cash.

71
 Automated Clearing House: services are usually offered by the cash
management division of a bank. The Automated Clearing House is an
electronic system used to transfer funds between banks. Companies
use this to pay others, especially employees (this is how direct deposit
works). Certain companies also use it to collect funds from customers
(this is generally how automatic payment plans work). This system is
criticized by some consumer advocacy groups, because under this
system banks assume that the company initiating the debit is correct
until proven otherwise.

 Balance Reporting Services: Corporate clients who actively manage

their cash balances usually subscribe to secure web-based reporting of
their account and transaction information at their lead bank. These
sophisticated compilations of banking activity may include balances
in foreign currencies, as well as those at other banks. They include
information on cash positions as well as 'float' (e.g., checks in the
process of collection). Finally, they offer transaction-specific details
on all forms of payment activity, including deposits, checks, wire
transfers in and out, ACH (automated clearinghouse debits and
credits), investments, etc.

 Cash Concentration Services: Large or national chain retailers often

are in areas where their primary bank does not have branches.
Therefore, they open bank accounts at various local banks in the area.
To prevent funds in these accounts from being idle and not earning
sufficient interest, many of these companies have an agreement set
with their primary bank, whereby their primary bank uses the
Automated Clearing House to electronically "pull" the money from
these banks into a single interest-bearing bank account.

72
 Lockbox - Retail: services: Often companies (such as utilities) which
receive a large number of payments via checks in the mail have the
bank set up a post office box for them, open their mail, and deposit
any checks found. This is referred to as a "lockbox" service.

 Lockbox - Wholesale: services: are for companies with small

numbers of payments, sometimes with detailed requirements for
processing. This might be a company like a dentist's office or small
manufacturing company.

 Positive Pay: Positive pay is a service whereby the company

electronically shares its check register of all written checks with the
bank. The bank therefore will only pay checks listed in that register,
with exactly the same specifications as listed in the register (amount,
payee, serial number, etc.). This system dramatically reduces check
fraud.

 Reverse Positive Pay: Reverse positive pay is similar to positive pay,

but the process is reversed, with the company, not the bank,
maintaining the list of checks issued. When checks are presented for
payment and clear through the Federal Reserve System, the Federal
Reserve prepares a file of the checks' account numbers, serial
numbers, and dollar amounts and sends the file to the bank. In reverse
positive pay, the bank sends that file to the company, where the
company compares the information to its internal records. The
company lets the bank know which checks match its internal
information, and the bank pays those items. The bank then researches
the checks that do not match, corrects any misreads or encoding
errors, and determines if any items are fraudulent. The bank pays only

73
 "true" exceptions, that is, those that can be reconciled with the
company's files.

 Sweep accounts: are typically offered by the cash management

division of a bank. Under this system, excess funds from a company's
bank accounts are automatically moved into a money market mutual
fund overnight, and then moved back the next morning. This allows
them to earn interest overnight. This is the primary use of money
market mutual funds.

 Zero Balance Accounting: can be thought of as somewhat of a hack.

Companies with large numbers of stores or locations can very often
be confused if all those stores are depositing into a single bank
account. Traditionally, it would be impossible to know which
deposits were from which stores without seeking to view images of
those deposits. To help correct this problem, banks developed a
system where each store is given their own bank account, but all the
money deposited into the individual store accounts are automatically
moved or swept into the company's main bank account. This allows
the company to look at individual statements for each store. U.S.
banks are almost all converting their systems so that companies can
tell which store made a particular deposit, even if these deposits are
all deposited into a single account. Therefore, zero balance
accounting is being used less frequently.

 Wire Transfer: A wire transfer is an electronic transfer of funds.

Wire transfers can be done by a simple bank account transfer, or by a
transfer of cash at a cash office. Bank wire transfers are often the
most expedient method for transferring funds between bank accounts.
A bank wire transfer is a message to the receiving bank requesting

74
 them to effect payment in accordance with the instructions given. The
message also includes settlement instructions. The actual wire
transfer itself is virtually instantaneous, requiring no longer for
transmission than a telephone call.

 Controlled Disbursement: This is another product offered by banks

under Cash Management Services. The bank provides a daily report,
typically early in the day, that provides the amount of disbursements
that will be charged to the customer's account. This early knowledge
of daily funds requirement allows the customer to invest any surplus
in intraday investment opportunities, typically money market
investments. This is different from delayed disbursements, where
payments are issued through a remote branch of a bank and customer
is able to delay the payment due to increased float time.

75
 4.2.3 BILL FOR COLLECTION

1. Background

Inter-Province Cheque Clearing System is the clearing procedure for

cheque, draft, bill of exchange, and promissory note in case that a collecting
branch and a paying branch are located in different clearing areas.

The collecting bank has two alternatives of sending B/C for funds collection

First method:  The collecting bank sends cheques to its branch that is
located within the same clearing house as the paying bank. The cheques
then enter one-day clearing. Once the B/C results are known, the agent
branch then notifies the original branch that called for collection.

Second method:  Generally used when the collecting bank does not have a
branch within the same clearing center as the paying bank, here the
collecting bank sends the cheques through to the paying bank’s headquarter
via ECH, who calculates the net clearing positions for the member banks.
The paying bank notifies its counterparty, the collecting bank, of the B/C
results, and record the information for ECH, who then carries out interbank
settlement via BAHTNET.

Both methods, according to an agreement reached among member banks,

should take no more than 15 working days. With the new BOT regulation
introduced, both methods must take no more than 6 working days. As for
the development to improve system efficiency and achieve one-day
clearing, this depends on the member banks’ readiness with regards to
acquiring the on-line signature authentication technology necessary in order
that bank branches throughout the country would be able to authorize
cheques on-line. BOT is in the process of establishing working plans that
are appropriate for the new technologies.
76
Present, collecting banks can operate the bills for collection in two
ways:               

1. Collection through the provincial clearing house of the paying bank's

area. With this method, a collecting branch transports cheques to another
branch, which is located in the same clearing area as the paying branch. The
collecting branch must complete the clearing process within 5 working days
next to the date of deposit.

2. Collection through the headquarter in Bangkok. A cheque deposited in

Bangkok can be cleared via the clearing system that can complete the
process within 3 working days starting from the date that the physical
cheque is exchanged. Due to its clearing duration, this clearing system is
called "B/C-3D".

  

 2. Regulations, Guidelines, and Policies

The BOT has issued The Bank of Thailand Regulation on Inter – Provincial
Cheque Collection B.E. 2546 as amended in B.E 2548, 2550. The regulation
determined BOT' s authorities and responsibilities for settlement service. In
addition, it determines the  member banks' responsibilities to perform the
process according to The Bank of Thailand Notification on principles,
procedures and time period for settlement.

 3. Participants in the System

77
There are 2 kinds of members: A direct member refers to a bank that
operates both collecting and paying functions. Moreover, the bank must be
able to operate paying function in all regional areas as determined by BOT.
A direct member can receive collection fees. An indirect member refers to a
bank that operates the collecting function, but does not have branches to
operate the paying function in all regional areas as determined by BOT. An
indirect member will not receive any collection fees.

  

 4. Operational Procedures

A major branch of a collecting bank submits cheques through the clearing

house for its collecting branches and a major branch of a paying bank
verifies the cheque for its account-holding branch.

Normal Round

The headquarter of the collecting bank prepares out-clearing cheque data in

the format complied with the BOT standard and submits the data to the
Electronic Clearing House (ECH) via the Electronic Financial Services
(EFS). ECH then calculates net clearing position and generates in-clearing
data. Physical cheques are sorted by bank and exchanged at the ECH.

Return Round Clearing

Once cheques are exchanged at the ECH, the paying bank verifies those
cheques by validating completeness of the physical cheque, verifying
payer's signature, and debits customer's account in 1-2 days. Returned
cheque data and physical cheques must be submitted back to the collecting
bank in 3 working days.

78
 5. Processing and Equipment

Microcomputers with printers, SMART Card Reader and card reader.

Linkage and transmit message via BOT WEB PORTAL through Electronic
Financial Service (EFS) provided by BOT.

 6. Settlement Procedures

The  B/C – 3D clearing position is settled at 1:00 p.m. of  day 3 via
BAHTNET. The position equals to the clearing position in day 1 minus the
position of the returned cheque in day 3. The sending bank credits the
customer’s account after the returned round.

 7. Pricing Policy

ECH is a non-profit operation. For processing B/C – 3D transactions, the

sending bank would be changed Baht 0.60 per cheque.

Interbank fees are allocated to collecting and paying banks. However, the
allocation ratio is currently determined as 100:0 for collecting and paying
banks respectively. Thailand Banker Association will revise the appropriate
ratio later.

Commercial banks that provide provincial cheque services set fees based on
standard rates of the Thai Bankers' Association, which is 10 baht per each
10,000 baht with the minimum of 10 baht, which is calculated on the face
amount of the cheque.

79
 

 8. Contingency Plans

BOT has drawn up contingency plans depend on the level of serious

situation of member bank side and Electronic Clearing House side as
follows:

1. In the event that a member bank cannot send the clearing data to the
Electronic Clearing House (ECH) via EFS, a member bank is able to switch
to use other means of communication to send the clearing data.

2. In the event that BOT Web Station of a member bank fails, the member
bank brings the clearing data to ECH in order to send the clearing data via
BOT Web Station at ECH.

3. In the event that the member bank’s system, prepared the clearing data,
fails, use the B/C Stand alone at ECH instead. 

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 CHAPTER 5

FOREX

5.1PEOPLE CONDUCT FOREX TRADE

5.2 HOW IS FOREX TRADING CONDUCTED?

5.3 BENEFITS OF FOREX TRADING

5.4 DETERMINANTS OF FOREX RATES

5.5 ECONOMIC FACTORS

5.6 POLITICAL CONDITIONS

81
 CHAPTER 5

FOREX

Forex trading [FX trading] involves the buying and selling of currencies of
various different nations. In this type of trade, currencies are exchanged on a
continuous basis in the forex market that covers the globe. People have
several opportunities for profit-making in forex trading when value of one
currency fluctuates against that of another.

Forex trading is quite popular due to several factors like the leverage
available, the high liquidity 24 hours a day and the very low dealing costs.

Evidently many commercial organizations participate in such trades purely

due to the currency exposures created through their import and export
activities, but the major part of the turnover is accounted for by financial
institutions. Investing in foreign exchange remains mainly the domain of the
big professional players in the market, such as funds, banks and brokers.
Nonetheless, any investor having the necessary knowledge of the market's
functions can also benefit from the advantages stated above.

5.1 People conduct Forex Trade to:

1. To Make direct foreign investments

2. Earn profits and make money from short-term fluctuations in the
values of a currency pair
3. Control their existing positions in the market
4. Fulfill their import and export needs

In forex market, there does not exist any centralized exchange, trading is
conducted either through the Electronic Broking System (EBS) or online
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through the Internet. Online forex trading is very popular among individual
investors. High leverage, flexibility and liquidity are the three main factors
that attract people towardsforex trading.

5.2 How is Forex Trading Conducted?

Similar to other transactions, forex trading involves sellers, buyers, and

intermediaries. While buyers and sellers in this market could be banks,
investment management firms, commercial companies, hedge funds and
retail investors, the intermediaries are the brokers. Forex brokers act as
market makers and place bid and ask prices for a currency pair on behalf of
the buyer or the seller.

Buyers make money by buying a currency at a lower price and selling it

later at a higher price. All transactions by individual traders in case of
theforex market occur through brokers. However, the majority of the forex
trade is conducted between banks.

5.3 Benefits of Forex Trading

1. It is done in an extremely liquid market. Hence, one is unlikely to get

stuck in a trade. He/she can open and close any position according to
his/her desired level.
2. Traders can make profits in both rising and falling markets. One can
take a short position (selling the currency pair and purchasing it back
at a lower price) or long position (purchasing the currency pair and
selling it later at a higher price).
3. Gives traders an option to trade in small lots. This allows a beginner
or a novice trader to begin with small amount of capital and limits the
risks.

83
 4. Traders don't need to pay commissions to brokers. The transaction
cost is built into the currency price and is known as spread, which is
actually the difference between the buying and selling price at a given
time.

5.4 Determinants of FX rates

See also: exchange rates

The following theories explain the fluctuations in FX rates in a floating

exchange rate regime (In a fixed exchange rate regime, FX rates are decided
by its government):

(a) International parity conditions: Relative Purchasing Power Parity,

interest rate parity, Domestic Fisher effect, International Fisher effect.
Though to some extent the above theories provide logical explanation
for the fluctuations in exchange rates, yet these theories falter as they
are based on challengeable assumptions [e.g., free flow of goods,
services and capital] which seldom hold true in the real world.

(b) Balance of payments model (see exchange rate): This model,

however, focuses largely on tradable goods and services, ignoring the
increasing role of global capital flows. It failed to provide any
explanation for continuous appreciation of dollar during 1980s and
most part of 1990s in face of soaring US current account deficit.

(c) Asset market model (see exchange rate): views currencies as an

important asset class for constructing investment portfolios. Assets
prices are influenced mostly by people’s willingness to hold the
existing quantities of assets, which in turn depends on their
expectations on the future worth of these assets. The asset market
model of exchange rate determination states that “the exchange rate

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 between two currencies represents the price that just balances the
relative supplies of, and demand for, assets denominated in those
currencies.”

5.5 Economic factors

These include: (a)economic policy, disseminated by government agencies

and central banks, (b)economic conditions, generally revealed through
economic reports, and other economic indicators.

 Economic policy comprises government fiscal policy

(budget/spending practices) and monetary policy (the means by which
a government's central bank influences the supply and "cost" of
money, which is reflected by the level of interest rates).
 Government budget deficits or surpluses: The market usually reacts
negatively to widening government budget deficits, and positively to
narrowing budget deficits. The impact is reflected in the value of a
country's currency.
 Balance of trade levels and trends: The trade flow between countries
illustrates the demand for goods and services, which in turn indicates
demand for a country's currency to conduct trade. Surpluses and
deficits in trade of goods and services reflect the competitiveness of a
nation's economy. For example, trade deficits may have a negative
impact on a nation's currency.
 Inflation levels and trends: Typically a currency will lose value if
there is a high level of inflation in the country or if inflation levels are
perceived to be rising. This is because inflation erodes purchasing
power, thus demand, for that particular currency. However, a
currency may sometimes strengthen when inflation rises because of

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 expectations that the central bank will raise short-term interest rates to
combat rising inflation.
 Economic growth and health: Reports such as GDP, employment
levels, retail sales, capacity utilization and others, detail the levels of
a country's economic growth and health. Generally, the more healthy
and robust a country's economy, the better its currency will perform,
and the more demand for it there will be.
 Productivity of an economy: Increasing productivity in an economy
should positively influence the value of its currency. Its effects are
more prominent if the increase is in the traded sector [3].

5.6 Political conditions

Internal, regional, and international political conditions and events can have
a profound effect on currency markets.

All exchange rates are susceptible to political instability and anticipations

about the new ruling party. Political upheaval and instability can have a
negative impact on a nation's economy. For example, destabilization of
coalition governments in Pakistan and Thailand can negatively affect the
value of their currencies. Similarly, in a country experiencing financial
difficulties, the rise of a political faction that is perceived to be fiscally
responsible can have the opposite effect. Also, events in one country in a
region may spur positive/negative interest in a neighboring country and, in
the process, affect its currency.

Market psychology

Market psychology and trader perceptions influence the foreign exchange

market in a variety of ways:

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 Flights to quality: Unsettling international events can lead to a "flight
to quality," with investors seeking a "safe haven." There will be a
greater demand, thus a higher price, for currencies perceived as
stronger over their relatively weaker counterparts. The U.S. dollar,
Swiss franc and gold have been traditional safe havens during times
of political or economic uncertainty.[14]
 Long-term trends: Currency markets often move in visible long-term
trends. Although currencies do not have an annual growing season
like physical commodities, business cycles do make themselves felt.
Cycle analysis looks at longer-term price trends that may rise from
economic or political trends.[15]
 "Buy the rumor, sell the fact": This market truism can apply to many
currency situations. It is the tendency for the price of a currency to
reflect the impact of a particular action before it occurs and, when the
anticipated event comes to pass, react in exactly the opposite
direction. This may also be referred to as a market being "oversold"
or "overbought".[16] To buy the rumor or sell the fact can also be an
example of the cognitive bias known as anchoring, when investors
focus too much on the relevance of outside events to currency prices.
 Economic numbers: While economic numbers can certainly reflect
economic policy, some reports and numbers take on a talisman-like
effect: the number itself becomes important to market psychology and
may have an immediate impact on short-term market moves. In recent
years, for example, money supply, employment, trade balance figures
and inflation numbers have all taken turns in the spotlight.
 Technical trading considerations: As in other markets, the
accumulated price movements in a currency pair such as EUR/USD
can form apparent patterns that traders may attempt to use.

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 CHAPTER 6

BANKING CHANNELS

Alternative Banking Channels

Business Internet Banking
Balance and Transaction Reporting
All deposit accounts you designate will be accessible through Business
Internet Banking. Get detailed information on your accounts and view your
latest account balances and transaction history.
Transfers
Transfer funds between your company's accounts within HSBC Philippines,
or just as easily to third party accounts in other local banks and abroad. You
can also request a cashier's order or demand draft, issue standing
instructions for regular transfers to other accounts within HSBC Philippines,
and create transfer templates to easily repeat transaction instructions with
minimal changes.

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Inquiries
Get indicative foreign exchange rates and time deposit rates.

Mail Options
Send and receive messages to and from HSBC using the secure mail option.
It's your constant direct line to the world's local bank.
Pay Bills
Pay local bills to various service providers. Funds will be remitted to the
service provider on the next working day of the payment instructions. Please
note this function is not available to delegates with an access level of
"Inquiry only". Speak to the Commercial Banking Relationship
Team about access level status on (02) 85-878 for local calls and +(63) (2)
85-87800 for international calls.
New Features
Our Internet Banking site has been revamped to provide you with a superior
online banking experience. The new layout and design makes it easier for
you to navigate through the products and services. New features include an
Autopay function to make bulk payments to other accounts in HSBC, as
well as improved security functionality to ensure high value transactions
require authorization from two pre-authorized users before completion.
Security
Business Internet Banking uses what may be considered the latest and most
secure technology available. A 128-bit encryption code protects all bank
transfers and on-line bank instructions. While all delegates will be provided
with their Business Internet Banking Username, they can choose their
individual Personal Internet Banking Password (6-8 characters).

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 CHAPTER 7

NATIONAL ELECTRONIC FUND TRANSFER

&

REAL TIME GROSS SETTLEMENT

SERVICES

The NEFT (National Electronic Fund Transfer) Service helps in the

seamless transfer of funds from one branch to another without any delays or
procedural hassles. Like RTGS, RBI has introduced another type of funds
transfer system called NEFT (National Electronic Funds Transfer). The
operations and functions of the system are similar to RTGS. We have
become active member of NEFT system and we propose to introduce a new
product called TMB e-Transfer (NEFT).

This facility can be availed only by account holders of our bank since both
the beneficiary as well as applicant account number (TMB account number)
should be compulsorily mentioned in the NEFT application form.

In RTGS, Settlement will take place continuously between 9.00 A.M and
2.00 P.M and the return time allowed is up to two hours from the time of the
receipt of the payment. However, in NEFT, there are four clearing
settlement batches (9.30,10.30,12.00, & 4.00) and the return time allowed is
24 hours. The messages received by RBI within each settlement batch time
will be consolidated and distributed to payee's banks after settlement.
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Normally, payment message reaches receiving (payee's) bank within 15 to
30 minutes from the batch time. For e.g. message sent to RBI for the 12.00
clock settlement batch, will reach receiving bank by 12.30 P.M. If the
receiving bank has STP (Straight Through process) facility, the amount will
be credited immediately, or otherwise, the amount may be credited within
the end of the day. However, if the receiving bank wants to return the
message, they should return within 12.00 Noon batch of next settlement day
(Within 24 hours).

RBI has introduced NEFT system mainly to send small value payments at
nominal cost. We can send funds from our bank to other bank-branches,
which have IFS Code, and joined in NEFT network. So far, 42 banks have
joined in this system and more than 10000 of their branches are under this
network. More bank-branches are expected to join in the days to come.

In order to encourage small value payments through NEFT, we have fixed

nominal charges only. Commission for Outward Payment is Rs. 5/- flat for
amounts less than Rs. 1,00,000.00 and Rs. 25/- flat for transactions for Rs.
1,00,000.00. There is no minimum transfer amount limit. However, only
upto Rs. 1,00,000.00 can be transferred per transaction. There is no inward
payment charges under NEFT.

Our customers are adviced to instruct their counterpart to quote correctly the
full 15-digit account number for inward payment to identify the branch and
credit their account immediately. If the message received is without 15-digit
account number it will be rejected and returned automatically.

NEFT is the most suitable mode of payment for small value payments as the
charges are cheaper and settlements are faster when compared with other
modes of payment

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 REAL TIME GROSS SETTLEMENT

Learn more about the latest technology oriented service being provided by
our TMB viz. RTGS. TMB was one of the earliest adopters of RTGS
facility in India and currently all our branches are RTGS enabled. Under this
system funds can be transferred between two RTGS enabled bank branches
irrespective of the bank and the location of the branch.

Reach your beneficiaries within 2 hours:

Every branch of our bank has a distinctive RTGS Code and the same can be
seen in the branch network under the details for every branch.

Tamilnadu Mercantile Bank Ltd., implemented its ANY BANK / BRANCH

Money Transfer facility to its customers under RTGS mode on 14.01.2005.
Through this facility one can receive payment from any other banks'
branches who are RTGS members having IFS code or make payment to any
other banks' branches who are RTGS members having IFS code located
across the country within two hours at cheaper cost and at the same time
with high safety.

In India, 115 Banks have started RTGS transactions with more than 25000
branches. On 14.01.2005, TMB started this facility with 45 of its branches.
The scheme has been receiving good response from the public and the
number of transactions through RTGS is on the increasing trend. So TMB
decided to have 100% RTGS status for customer transactions and to enable
all its 217 branches under RTGS from 8th July 2005. TMB is the First
Bank in Tamilnadu and 3rd in India to achieve 100% RTGS Status
throughout India at all its branches without exception. It is possible because,
TMB has already networked all its 217 branches, all the 7 Regional Offices,

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Extension Counters and Head Office under the 'Finacle' platform provided
by the renowned software major 'Infosys'.

Through RTGS one can send / receive payments across the country to / from
any bank / any branch provided sending bank as well as receiving bank are
members of RTGS and their branches are RTGS enabled with IFSC Code.
RTGS facilitates quick fund transfer and settlements among the banks for
inter bank and customer transactions. It reduces the settlement risk, as
payments are made online basis. This system is very much useful not only
among banks but also for customers as payment / receipt is made on the
same day on real time basis and without any risk, i.e., within two hours at
cheaper cost.

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 CHAPTER 8

THE PRINCIPLES

 The system should have a well-founded legal basis under all relevant
jurisdictions.

 The system's rules and procedures should enable participants to have

a clear understanding of the system’s impact on each of the financial
risks they incur through participation in it.

 The system should have clearly defined procedures for the

management of credit risks and liquidity risks, which specify the
respective responsibilities of the system operator and the participants
and which provide appropriate incentives to manage and contain
those risks.
 The system should provide prompt final settlement on the day of
value, preferably during the day and at a minimum at the end of the
day. (Systems should seek to exceed the minima included in this Core
Principle.)

 A system in which multilateral netting takes place should, at a

minimum, be capable of ensuring the timely completion of daily
settlements in the event of an inability to settle by the participant with
the largest single settlement obligation. (Systems should seek to
exceed the minima included in this Core Principle.)

 Assets used for settlement should preferably be a claim on the central

bank; where other assets are used, they should carry little or no credit
risk and little or no liquidity risk.

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 QUESTIONAIRE

How much foreign exchange is available for a business trip?

Authorised dealers can release foreign exchange up to US$25,000 for a
business trip to any country other than Nepal and Bhutan. Release of foreign
exchange exceeding US$25,000 for travel abroad (other than Nepal and
Bhutan) for business purposes, irrespective of period of stay, requires prior
permission from Reserve Bank. Visits in connection with attending of an
international conference, seminar, specialised training, study tour,
apprentice training, etc., are treated as business visits.

Can residents obtain foreign exchange for medical treatment outside

India?
For medical treatment abroad exchange can be released upto USD 100,000/-
based on a simple declaration from the customer in addition to submission
of an application form and Form A2 as per the recent liberalisation policy of
The Reserve Bank of India.

How much exchange is available for studies outside India?

Release of Foreign exchange for studies abroad has now been increased to
USD 100,000/- based on a simple declaration from the customer in addition
to submission of an application form and Form A2 as per the recent
liberalisation policy of The Reserve Bank of India.

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How much foreign exchange can one buy when going for tourism to a
country outside India?
In connection with private visits abroad, viz., for tourism purposes, etc.,
foreign exchange up to US$10,000, in any one calendar year may be
obtained from an authorised dealer. The ceiling of US$10,000 is applicable
in aggregate and foreign exchange may be obtained for one or more than
one visits provided the aggregate foreign exchange availed of in one
calendar year does not exceed the prescribed ceiling of US$10,000 {The
facility was earlier called B.T.Q or F.T.S.}. This US$10,000 (BTQ) can be
availed of by a person alongwith foreign exchange for travel abroad for any
purpose, including for employment or immigration or studies. However, no
foreign exchange is available for visit to Nepal and/or Bhutan for any
purpose. The same can be obtained based on a simple declaration from the
customer in addition to submission of an application form and Form A2 as
per the recent liberalisation policy of the Reserve Bank of India.

How much foreign exchange is available to a person going abroad on

employment?
Person going abroad for employment can draw Foreign Exchange upto USD
100,000/- based on a simple declaration from the customer in addition to
submission of an application form and Form A2 as per the recent
liberalisation policy of The Reserve Bank of India.

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How much foreign exchange is available to a person going abroad on
immigration?
Persons going abroad for immigration can draw foreign exchange upto USD
100,000/- based on a simple declaration from the customer in addition to
submission of an application form and Form A2 as per the recent
liberalisation policy of The Reserve Bank of India.

Is there any purpose for which going abroad requires prior approval
from the Reserve Bank or Govt. of India?
Dance troupes, artistes, etc., who wish to undertake cultural tours abroad,
should obtain prior approval from the Ministry of Human Resources
Development, Government of India, New Delhi.

From where one can buy foreign exchange?

Foreign exchange can be purchased from most branches of HDFC Bank.
The Foreign Exchange can be taken as Currency notes and Traveller's
Cheques besides Foreign Currency DDs and Telegraphic Transfers
depending on the purpose of travel.

How much foreign exchange can be purchased in foreign currency

notes while buying exchange for travel abroad?
Travellers are allowed to purchase foreign currency notes/coins only up to
US$ 3000. Balance amount can be taken in the form of Traveller's Cheque,

97
banker's draft or Forexplus card. Exceptions to this are (a) travellers
proceeding to Iraq and Libya can draw foreign exchange in the form of
foreign currency notes and coins not exceeding US$ 5000 or its equivalent;
(b) travellers proceeding to the Islamic Republic of Iran, Russian Federation
and other Republics of Commonwealth of Independent States can draw
entire foreign exchange released in form of foreign currency notes or coins.

How much in advance one can buy foreign exchange for travel abroad?
The foreign exchange acquired for any purpose has to be used within 60
days of purchase. In case it is not possible to use the foreign exchange
within the period of 60 days it should be surrendered to an authorised
dealer.

How much foreign exchange can one send as gift / donation to a person
resident outside India?
Any person resident in India under the liberalised remittance scheme can
remit upto US$ 200,000 in an finanacial year as a gift to a person residing
outside India or as donation to a charitable / educational / religious / cultural
organisation outside India. This remittance can be done only under the
liberalised remittance scheme and is meant for individual only

98
While coming into India how much foreign exchange can be brought in
by NRIs?
An NRI coming into India from abroad can bring with him foreign
exchange without any limit provided if foreign currency notes, travellers
cheques, Forexplus Card exceed US$ 10,000/- or its equivalent and/or the
value of foreign currency exceeds US$ 5,000/- or its equivalent, it should be
declared to the Customs Authorities at the Airport in the Currency
Declaration Form (CDF), on arrival in India.

Can a Resident Indian maintain Foreign currency accounts in India?

A resident Indian can maintain a Foreign Currency (Domestic) Account and
deposit Foreign Exchange acquired from any of the sources approved by
Reserve bank of India e.g. . Unspent BTQ, honorarium or gift / payment for
services while on a visit outside India or received from a person not resident
in India or who is on visit to India in settlement of a lawful obligation etc.

Can a Non HDFC Bank customer avail of Foreign Exchange Services

for purpose of Travel or make remittances overseas?
Yes, a Non HDFC Bank Customer can take foreign exchange for any branch
dealing in foreign exchange. You can avail of Foreign Exchange against
paying Cash, Cheque or Pay Order / Demand Draft. The Cash will be
accepted upto Rs. 50,000/- (as per Indian Tax Laws) and any amount above
Rs. 50,000/- will against Pay Order or Cheque after clearance of the same.
You will have to carry required Documentary Proof for issuance of Foreign
Exchange.

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 CONCLUSION

Payment systems are the backbone of the financial infrastructure of the

nation, enhance globalization and act as tools of economic empowerment by
financial inclusion. There is a need to create payment systems that are
efficient, reliable, affordable and of global standards.

Proliferation of modern payment systems have far reaching economic and

social implications for India where significant population have so far been
excluded from the benefits of the financial system. Efficient payment
systems help in financial inclusion. Implementation of such systems
increase transparency, lower transaction costs, improves operational
efficiency of trade and commerce and provides support to globalization of
economy.

I record my appreciation for Bank net India who is organizing such highly
focused banking conferences and workshops. I am sure, this initiative on the
part of Bank net India will provide a platform for knowledge sharing and
networking for the professionals from banking industry.

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 BIBLIOGRAPHY

 WIKIPEDIA.COM
 NIIT
 GOOGLE.COM
 UNION BANK OF INDIA
 MASTERCARD.COM

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