All about a BANK CARD

A Bank Card is typically a plastic card issued by a bank to its clients that performs one or more of a number of
services that relate to giving the client access to funds, either from the client's own bank account, or through a
credit account.

Cards can be classified on the basis of their issuance, usage and payment
by the card holder. There are three types of cards

 Debit Cards
 Credit Cards
 Prepaid Cards

Debit cards
Debit cards are issued by banks and are linked to a bank account.
The debit cards are used to withdraw cash from an ATM, purchase of goods and services at Point of Sale
(POS)/E-commerce (online purchase) both domestically and internationally (provided it is enabled for
international use). However, it can be used only for domestic fund transfer from one person to another.

Credit Cards
Credit cards are issued by banks / other entities approved by RBI. The credit limits sanctioned to a card holder is
in the form of a revolving line of credit (similar to a loan sanctioned by the issuer) and may or may not be linked to
a bank account.
The credit cards are used for purchase of goods and services at Point of Sale (POS) and E-commerce (online
purchase)/ through Interactive Voice Response (IVR)/Recurring transactions/ Mail Order Telephone Order
(MOTO). These cards can be used domestically and internationally (provided it is enabled for international use).
The credit cards can be used to withdraw cash from an ATM and for transferring funds to bank accounts, debit
cards, credit cards and prepaid cards within the country.

Prepaid Cards
Prepaid cards are issued by the banks / non-banks against the value paid in advance by the cardholder and
stored in such cards which can be issued as smart cards or chip cards, magnetic stripe cards, internet accounts,
internet wallets, mobile accounts, mobile wallets, paper vouchers, etc.
The usage of prepaid cards depends on who has issued these cards. The prepaid cards issued by the banks can
be used to withdraw cash from an ATM, purchase of goods and services at Point of Sale (POS)/E-commerce
(online purchase) and for domestic fund transfer from one person to another. Such prepaid cards are known as
open system prepaid cards. However, the prepaid cards issued by authorised non-bank entities can be used only
for purchase of goods and services at Point of Sale (POS)/E-commerce (online purchase) and for domestic fund
transfer from one person to another. Such prepaid cards are known as semi-closed system prepaid cards. These
cards can be used only domestically.
The maximum value that can be stored in any prepaid card (issued by banks and authorised non-bank entities) at
any point of time is Rs 1,00,000/-

The following types of semi closed pre-paid payment instruments can be issued by carrying out Customer Due
Diligence as detailed by the banks and authorised non- bank entities:

 Up to Rs.10,000/- by accepting minimum details of the customer provided the amount outstanding at
any point of time does not exceed Rs 10,000/- and the total value of reloads during any given month
also does not exceed Rs 10,000/-. These can be issued only in electronic form.
 from Rs.10,001/- to Rs.50,000/- by accepting any ‘officially valid document’ defined under Rule 2(d) of
the PML Rules 2005, as amended from time to time. Such PPIs can be issued only in electronic form
and should be non-reloadable in nature;
 up to Rs.50,000/- with full KYC and can be reloadable in nature. The balance in the PPI should not
exceed Rs.50,000/- at any point of time.
Something more to a Bank Card.....

 Who decides the limits on cash withdrawal or purchase of goods and services through use of a
card?

The limits on cash withdrawal at ATMs and for purchase of goods and services are decided by the issuer bank.
However, in case of cash withdrawal at other bank’s ATM, there is a limit of Rs 10,000/- per transaction. Cash
withdrawal at POS has also been enabled by certain banks wherein, a maximum of Rs.1000/- can be withdrawn
daily by using debit cards.

 Is the customer charged by his/her bank when he uses his debit card at other banks ATM for
withdrawing cash?

The savings bank account customer will not be charged by his/her bank up to five transactions (inclusive of both
financial and non-financial transactions) in a month if he/she uses an ATM of another bank. However, within this
overall limit of five free transactions, for transactions done at ATM of another bank located in the six metro
centres, viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad, the free transaction limit is set to
three transactions per month.

 Where should the customer lodge a complaint in the event of a failed ATM transaction (account
debited but cash not dispensed at the ATM)?

The customer has to approach his/her bank (bank that issued the card) to lodge a complaint in the event of a
failed ATM transaction.

 What is the time limit for resolution of the complaint pertaining to failed ATM transaction?

The time limit, for resolution of customer complaints by the issuing banks, is within 7 working days from the date
of receipt of customer complaint. Hence the bank is supposed to re-credit the customer’s account within 7
working days. For failure to re-credit the customer’s account within 7 working days of receipt of the complaint
from the customer, the bank is liable to pay Rs 100 per day as compensation to the customer.

 What is the option for a card holder if his complaint is not redressed by the issuer?

If a complainant does not get satisfactory response from his/her bank within a maximum period of thirty (30) days
from the date of his lodging the complaint, he/she will have the option to approach the Office of the Banking
Ombudsman (in appropriate jurisdiction) for redressal of his grievance.

 How are the transactions carried out through cards protected against fraudulent usage?

For carrying out any transactions at an ATM, the card holder has to key in the PIN which is known only to him/her
for debit/credit and prepaid cards. However, for carrying out transactions at POS too, the card holder has to key-
in the PIN which is known only to the card holder if a debit card is used. In the case of credit card usage at POS
the requirement of PIN depends on the banks policy on security and risk mitigation. In the case of e-commerce
transactions, additional factor of authentication is applicable except in case of international websites.

 What are the liabilities of a bank in case of fraudulent use of a card by unauthorised person?
In case of card not present transactions RBI has mandated providing additional factor of authentication (if the
issuer bank and e-commerce merchant bank is in India). Hence, if a transaction has taken place without the
additional factor of authentication and the customer has complained that the transaction is not effected by
her/him, then the issuer bank shall reimburse the loss to the customer without demur.

 Is there anyway a customer can come to know quickly whether a fraudulent transaction has
taken place using his/her card?

RBI has been taking various steps to ensure that card payment environment is safe and secure. RBI has
mandated banks to send online alerts for all card transactions so that a card holder is aware of transactions
taking place on his / her card.

 What is the mandate for banks for issuing Magnetic stripe cards or Chip-based cards?

RBI has mandated that banks may issue new debit and credit cards only for domestic usage unless international
use is specifically sought by the customer. Such cards enabling international usage will have to be essentially
EMV Chip and Pin enabled. The banks have also been instructed to convert all existing Mag-stripe cards to EMV
Chip card for all customers who have used their cards internationally at least once (for/through e-
commerce/ATM/POS).

Read more: http://www.bankersadda.com/2015/01/all-about-bank-card.html#ixzz3Q4tiH4Mx

Banking Awareness: The Indian Financial System

The term "finance" in our simple understanding it is perceived as equivalent to
'Money'.Finance exactly is not money, But it is the source of providing funds for a particular
activity.The word "system", in the term "financial system", implies a set of complex and
closely connected or interlined institutions, agents, practices, markets, transactions, claims,
and liabilities in the economy. The financial system is concerned about money, credit and
finance-the three terms are intimately related yet are somewhat different from each other.
Components/ Constituents of Indian Financial system:

FINANCIAL INSTRUMENTS

Money Market Instruments

The money market can be defined as a market for short-term money and financial assets that are near substitutes for
money.The term short-term means generally a period upto one year and near substitutes to money is used to denote any
financial asset which can be quickly converted into money with minimum transaction cost.
Some of the important money market instruments are briefly discussed below:

1. Call /Notice-Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a
day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money,
borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money".
When money

is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover
these transactions.

2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are
the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend
beyond 14 days.

3. Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the
Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of
issue(91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value
is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.

4. Certificate of Deposits

Certificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialised form or as a Usance
Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period.

5. Commercial Paper

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed
into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value
determined by market forces.

Capital Market Instruments

The capital market generally consists of the following long term period i.e., more than one year period, financial
instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible
preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc.

Hybrid Instruments

Hybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid
instruments.Examples are convertible debentures, warrants etc.

FINANCIAL MARKETS

Financial market is a market where financial instruments are exchanged or traded and helps in determining the
prices of the assets that are traded in and is also called the price discovery process.
TYPES OF FINANCIAL MARKETS

Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of
currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market.
This is one of the most developed and integrated market across the globe

MONEY MARKET:

The money market is a market for short-term funds, which deals in financial assets whose

period of maturity is upto one year. It should be noted that money market does not deal in

cash or money as such but simply provides a market for credit instruments such as bills of

exchange, promissory notes, commercial paper, treasury bills, etc.

CAPITAL MARKET

Capital Market may be defined as a market dealing in medium and long-term funds. It is an institutional
arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of
securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign
markets and raising of capital by issue various securities such as shares debentures, bonds, etc.The market
where securities are traded known as Securities market. It consists of two different segments namely primary and
secondary market The primary market deals with new or fresh issue of securities and is, therefore, also known as
new issue market;whereas the secondary market provides a place for purchase and sale of existing securities
and is often termed as stock market or stock exchange.

CREDIT MARKET

Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate
and individuals.

Read more: http://www.bankersadda.com/2015/01/the-indian-financial-system.html#ixzz3Q4w5Z2ek

anking Awareness: A summary on NEFT, RTGS & IMPS

National Electronic Fund Transfer (NEFT)

 Meaning – It is way in which you can transfer fund from any bank account to any other bank account
holder in India. NEFT is based on batch processing system.

 Minimum amount – Rs. 1

 Maximum amount – There is no upper ceiling for transferring money through NEFT, but generally
RTGS is used for transfer of Rs 2,00,000 or above

 Time limit – The transactions are processed in hourly batches. There are twelve settlements from 8
A.M. to 7 P.M. on the weekdays (Monday – Friday) and six settlements from 8 A.M. to 1 P.M. on
Saturday. The maximum time consumed is 2 hours from the submitting of the transaction in a batch.

 Availability – NEFT is not available on the bank holidays, RBI holiday and Sunday.

Note - For transferring funds to Nepal, the limit is of Rs. 50, 000.
Real Time Gross Settlement (RTGS)

 Meaning – It is way in which you can transfer fund from any bank account to any other bank account
holder in India in real time.

 Minimum amount – Rs 2,00,000

 Maximum amount – No limit

 Time limit – The transactions are processed on order basis i.e. Real time. The RTGS service is
available from 8 A.M to 8 P.M. on the weekdays (Monday – Friday) and from 8 A.M. to 3:30 P.M. on
Saturday. The transfer is instant but the bank is allowed to take up to 2 hours for crediting the amount to
the depositor account.

 Availability – RTGS is not available on the bank holidays, RBI holiday and Sunday.

Inter Mobile Payment Service (IMPS)

 Meaning – It is way in which you can transfer fund from any bank account to any other bank account
holder in India anytime.

 Minimum amount – Rs 1

 Maximum amount – Banks are allowed to set their own limit for IMPS.

 Time limit – It is real time. The depositor account is credited in less than 1 minute from the submission
of transaction.

 Availability – IMPS can be done 24X7 even on bank holidays, RBI holiday and Sunday

Thanks ThinkerMni!!!

Read more: http://www.bankersadda.com/2015/01/a-summary-on-neft-rtgs-imps.html#ixzz3Q4wL5sqW

Banking Awareness: Bretton Woods Twins

Bretton woods twins mean the organisations i.e.The International Monetary Fund (IMF) set up along with the
World Bank after the Second World War to assist in the reconstruction of war-ravaged countries. Leaders felt that
financial stability was best achieved when countries worked in an environment of interdependence.

The two organisations were agreed to be set up at a conference in Bretton Woods in the US. Hence,they are
known as the Bretton Woods twins.The Bretton Woods Conference, formally known as the United Nations
Monetary and Financial Conference,was the gathering of 730 delegates from all 44 Allied nations at the Mount
Washington Hotel, situated in Bretton Woods, New Hampshire, United States, to regulate the international
monetary and financial order after the conclusion of World War II.The conference was held from the 1st to 22nd
of July, 1944. Agreements were executed that later established the International Bank for Reconstruction and
Development (IBRD, which is part of today's (World Bank Group) and the International Monetary Fund (IMF)

INTERNATIONAL MONETARY FUND

IMF was supposed to oversee and monitor the economic performance of

188 member countries and warn them of any developing economic crisis.If any crisis does develop and a
country approaches IMF for help, the organisation chalks out a recovery plan, which includes imposition of
conditions for keeping the economies on a particular path.

The organization's objectives stated in the Articles of Agreement are:

 promote international economic cooperation,

 international trade,
 employment,
 exchange-rate stability including by making financial resources available to member countries to meet
balance-of-payments needs.

When did India take the IMF bailout package?

The Indian government, faced with a balance of payments crisis in 1991, took a loan and agreed to the reforms
process. The liberalisation in the economy was partly a concomitant of that need.

The IMF report is part of its mandate under Article IV of its constitution. The fund holds consultations with finance
ministries and central banks of each member countries annually for its spring meeting in Washington.

The decision of the IMF to intervene in any country is based on the governing board's decision. The voting rights
are determined historically by the economic strength of the countries. India, because of its rapidly growing
economic clout, has demanded a re-drawing of the voting rights, but that did not happen at the recent Singapore
meeting.Instead, the fund gave ad hoc voting right increase to China, South Korea, Turkey and Mexico. It has
promised a long-term revision in another two years.

WORLD BANK GROUP

World Bank group provides loans to developing countries for capital programs. The World Bank is a component
of the World Bank Group, and a member of the United Nations Development Group.
The World Bank's official goal is the reduction of poverty. According to its Articles of Agreement, all its decisions
must be guided by a commitment to the promotion of foreign investment and international trade and to the
facilitation of capital investment.
 The World Bank should not be confused with the United Nations World
Bank Group, a member of the United Nations Economic and Social Council and a family of five international
organizations that make leveraged loans to poor countries:

 International Bank for Reconstruction and Development (IBRD)

 International Development Association (IDA)
 International Finance Corporation (IFC)
 Multilateral Investment Guarantee Agency (MIGA)
 International Centre for Settlement of Investment Disputes (ICSID)

International Bank for Reconstruction and Development

IBRD is an international financial institution which offers loans to middle-income developing countries. The IBRD
is the first of five member institutions which compose the World Bank Group and is headquartered in Washington,
D.C., United States. It was established in 1944 with the mission of financing the reconstruction of European
nations devastated by World War II.Following the reconstruction of Europe, the Bank's mandate expanded to
advancing worldwide economic development and eradicating poverty. The IBRD provides commercial-grade or
concessional financingto sovereign states to fund projects that seek to improve transportation and infrastructure,
education, domestic policy, environmental consciousness, energy investments, healthcare, access to food and
potable water, and access to improved sanitation.

The International Development Association (IDA)

The IDA is an international financial institution which offers concessional loans and grants to the world's poorest
developing countries.The IDA is a member of the World Bank Group and is headquartered in Washington, D.C.,
United States. It was established in 1960 to complement the existing International Bank for Reconstruction and
Development by lending to developing countries which suffer from the lowest gross national income, from
troubled creditworthiness, or from the lowest per capita income.

International Finance Corporation (IFC)

The IFC was established in 1956 to support the growth of the private sector in the developing world. The IFC’s
stated mission is “to promote sustainable private sector investment in developing countries, helping to reduce
poverty and improve people’s lives.”IFC provides loans and equity financing,advice, and technical services to the
private sector. The IFC also plays a catalytic role, by mobilizing additional capital through loan syndication and by
lessening the political risk for investors, enabling their participation in a given project.

The International Centre for Settlement of Investment Disputes (ICSID)

The ICSID is considered to be the leading international arbitration institution devoted to resolving disputes
between States and foreign investors, also known as BIT arbitrations.Based in Washington, D.C. (U.S.A.) and
operating under the World Bank, ICSID was established in 1965 by the Convention on the Settlement of
Investment Disputes between States and Nationals of Other States (known as the ICSID Convention or
Washington Convention).

The Multilateral Investment Guarantee Agency (MIGA)

The MIGA is an international financial institution which offers political risk insurance and credit enhancement
guarantees. Such guarantees help investors protect foreign direct investments against political and non-
commercial risks in developing countries.MIGA is a member of the World Bank Group and is headquartered in
Washington, D.C., United States. It was established in 1988 as an investment insurance facility to encourage
confident investment in developing countries.

World Bank Group Strategy to Help India Achieve Its Vision

The World Bank Group’s new Country Partnership Strategy will guide its support to India from 2013 through
2017. The strategy aims to help the country lay the foundations for achieving its longer-term vision of “faster,
more inclusive growth.”

A key feature of the new strategy is the significant shift in support toward low-income and special category states,
where many of India’s poor and disadvantaged live.The new strategy proposes a lending program of $3 billion to
$5 billion each year over the next five years. Sixty percent of the financing will go to state government-backed
projects. Half of this, or 30% of total lending, will go to low-income or special category states, up from 18% of
lending under the previous strategy.

Read more: http://www.bankersadda.com/2015/01/bretton-woods-twins.html#ixzz3Q4wTDtjP

Banking Awareness: RBI Changed Key Rates

Since July 2014, inflationary pressures (measured by changes in the consumer price index) have been easing.
The path of inflation, while below the expected trajectory, has been consistent with the assessment of the
balance of risks in the Reserve Bank’s bi-monthly monetary policy statements.

To some extent, lower than expected inflation has been enabled by the sharper than expected decline in prices of
vegetables and fruits since September, ebbing price pressures in respect of cereals and the large fall in
international commodity prices, particularly crude oil. Crude prices, barring geo-political shocks, are expected to
remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel,
especially in the reading for December. Finally, the government has reiterated its commitment to adhering to its
fiscal deficit target.

These developments have provided headroom for a shift in the monetary policy stance. It may be recalled that
the fifth bi-monthly monetary policy statement of December had stated that “if the current inflation momentum and
changes in inflation expectations continue, and fiscal developments are encouraging, a change in the monetary
policy stance is likely early next year, including outside the policy review cycle”. In its public interactions, the RBI
had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary
targets would be met. Keeping this commitment in mind, it has been decided to:

 Reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per
cent to 7.75 per cent with immediate effect;
 Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and
time liabilities (NDTL);
 Continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo
rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking
system through auctions; and continue with daily variable rate repos and reverse repos to smooth
liquidity.
 Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 per cent, and the marginal
standing facility (MSF) rate and the Bank Rate to 8.75 per cent with immediate effect.

Read more: http://www.bankersadda.com/2015/01/rbi-changed-monetary-policy.html#ixzz3Q4wd82rS

Short Notes on CBS..!!

Hello Readers,
Here we are providing Short Notes on Core Banking Solutions - one of the hot topic asked in the Interviews.
Hope you like the post!!!

The term CORE means - Centralized Online Real-time Exchange.

What is CBS?
CBS refers to the software applications for recording transactions, storing customer information, calculating
interest and completing the process of passing entries in a single database.

What CBS does?

CBS enables accessing of complete customer account details centrally. It makes it possible for a bank customer
to access his bank account through whichever channel he prefers like internet banking, mobile banking, ATM etc.

CBS in India
This initiative was taken by the banks on the basis of ‘First Rangarajan Committee report’ on bank
computerisation submitted in the year 1984.

The committee was constituted under the chairmanship of Dr. C. Rangarajan (Then deputy governor of RBI).

Old generation banks initially were hesitant about this but with the advent of new generation private sector banks
in India during 1994-1996, the real era of bank marketing started and these banks started to offer any-where and
any-time banking facilities to its customers.

Syndicate Bank was the first among the Public Sector Banks to implement Core Banking.
First CBS branch of Syndicate bank was Jayanagar Branch in Bangalore.

Benefits of CBS

A. Benefits for the customers

 Through CBS a bank customer can avail banking facilities (transactions) 24x7.
 It is time saving, convenient and efficient.

B. Benefits for the banks

 This paradigm shift in banking has revolutionised the speed, efficiency and reach of the delivery
systems. It gives greater customer satisfaction which is essential for every bank in this day an age.
 Since it offers alternate channels than brick and mortar banking, it is a viable alternative to opening new
branches, therefore reduces a bank’s operational costs.
 Alternative for extended working hours.
 Reduces long queues in bank cash counters.

Read more: http://www.bankersadda.com/2015/01/short-notes-on-cbs.html#ixzz3Q4wmzZUy

Banking Awareness: BIS & Basel Norms

The Bank for International Settlements (BIS) established on 17 May 1930,is the world's oldest international financial
organisation. The BIS has 60 member central banks, representing countries from around the world that together make up
about 95% of world GDP.The head office is in Basel,Switzerland and there are two representative offices: in the Hong Kong
Special Administrative Region of the People's, Republic of China and in Mexico City.

The mission of the BIS is to serve central banks of different of nations in their pursuit of monetary and financial stability, to
foster international cooperation in those areas and to act as a bank for central banks.The Basel Committee is the primary
global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory
matters.

NORMS ISSUED BY BIS

Basel I
In 1988,The Basel Committee on Banking Supervision (BCBS) introduced capital measurement system called Basel capital
accord,also called as Basel 1. It focused almost entirely on credit risk. It defined capital and structure of risk weights for
banks. The minimum capital requirement was fixed at 8% of risk weighted assets (RWA). RWA means assets with different
risk profiles. For example, an asset backed by collateral would carry lesser risks as compared to personal loans, which have
no collateral. India adopted Basel 1 guidelines in 1999.The Basel I Accord, issued in 1988, has succeeded in raising the total
level of equity capital in the system.Like many regulations, it also pushed unintended consequences; because it does not
differentiate risks very well, it perversely encouraged risk seeking. It also promoted the loan securitization that led to the
unwinding in the subprime market.

Basel II
In June 1999, the Committee issued a proposal for a new capital adequacy framework to replace the 1988 Accord. This led
to the release of the Revised Capital Framework in June 2004. Generally known as‟Basel II”, the revised framework
comprised three pillars, namely minimum capital, supervisor review and market

discipline.

Minimum capital is the technical, quantitative heart of the accord.Banks must hold capital against 8% of their assets,
after adjusting their assets for risk.Supervisor review is the process whereby national regulators ensure their home country
banks are following the rules. If minimum capital is the rule book, the second pillar is the referee system.Market discipline is
based on enhanced disclosure of risk. This may be an important pillar due to the complexity of Basel. Under Basel II, banks
may use their own internal models (and gain lower capital requirements) but the price of this is transparency.

Basel III
Even before Lehman Brothers collapsed in September 2008, the need for a fundamental strengthening of the Basel II
framework had become apparent.The banking sector had entered the financial crisis with too much leverage and inadequate
liquidity buffers.Responding to these risk factors, the Basel Committee issued Principles for sound liquidity risk
management and supervision in the same month that Lehman Brothers failed. In July 2009, the Committee issued a further
package of documents to strengthen the Basel II capital framework, notably with regard to the treatment of certain
complex securitisation positions, off balance sheet vehicles and trading book exposures. In September 2010, the Group of
Governors and Heads of Supervision announced higher global minimum capital standards for commercial banks. This
followed an agreement reached in July regarding the overall design of the capital and liquidity reform package, now referred
to as“Basel III”.

INDIA AND BASEL NORMS:

 Presently indian banking system folllows basel II norms.

 The Reserve Bank of India has extended the timeline for full implementation of the Basel III capital regulations by
a year to march 31,2019.March 31, 2019.
 Around 10 public sector banks (PSBs) will get a total capital infusion of Rs 12,517 crore from the government
before this financial year ends.
 Government of India is scaling disinvesting their holdings in PSBs to 52 per cent.
Read more: http://www.bankersadda.com/2015/01/banking-awareness-bis-basel-norms.html#ixzz3Q4x5sldY

A Brief of SLR
Statutory Liquidity Ratio is the amount a commercial banks needs to maintain in the form of cash, or gold, or govt.
approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by RBI in order
to control the expansion of the bank credit.

The maximum limit of SLR is 40%

Current SLR is 22% of NDTL

What is a Basis point ?

It is the increase in interest rates in percentage terms. For instance, if the interest rate increases by 50 basis points (bsp), then
it means that interest rate has been increase by 0.50%. One percentage point is broken down into 100 basis points. Therefore,
an increase from 2% to 3% is an increase of one percentage point or 100 basis points.

NDTL - is the sum of all the demand (current account and savings account sum in bank ) and time (fixed
deposits or recurring deposits etc. which are to be paid on maturation), these are assets for us but a liability(debt)
for the banks.

Here is an example to show the effect of CRR and SLR.

Let say our Lena Bank had 100 Rs as NDTL they can give this much amount of loan to the needy hence Rs 100
will flow in the market(can cause inflation), so Mr. Bond (Rajan of RBI) said keep 4% (CRR) with us and 22% as
SLR in the form of govt securities and gold (which can’t be given as loans) so Lena bank is left with only 74%
[100 - (22 + 4)] of the NDTL resulting in lesser money to be given as loans and eventually resulting in a check on
inflation.

The main objectives for maintaining the SLR ratio are the following:

i. to control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of India can increase or decrease
bank credit expansion.

ii. to ensure the solvency of commercial banks.

iii. to compel the commercial banks to invest in government securities like government bonds.

Main use of SLR:

SLR is used to control inflation and propel growth. Through SLR rate the money supply in the system can be
controlled effectively.

What is the difference between SLR and CRR?

What SLR does is it restricts the bank's leverage in pumping more money into the economy. On the other hand,
CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the RBI. Higher the
ratio, the lower is the amount that banks will be able to use for lending and investment.
The other difference is that to meet SLR, banks can use cash, gold or approved securities where as with CRR it
has to be only cash. CRR is maintained in cash form with RBI, where as SLR is maintained in liquid form with
banks themselves.

What does a reduction in SLR mean?

A cut in SLR means that the home, car and commercial loan rates will go down. Banks will have more money
with them.
With the reduction of SLR, the RBI is shrinking the market for government securities and simultaneously enlarging
availability of credit to the private sector. With that, the cost of funds to the government will increase and the rate charged by
banks to the private sector decreases.

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A quick glance on Balance Sheet

Definition: A balance sheet is a document which summarizes a company’s assets, liabilities and
stockholders equity at a point of time. To put it in simple terms, a balance sheet is like a snap shot of
a horse race, shows the financial position of a company at a particular point of time.

Components of a balance sheet:

 Assets
 Liabilities
 Ratios used

Assets:
1. Current Assets: These are assets that may be converted into cash, sold or consumed within a
year or less. Current Assets include cash, marketable securities, Account and notes
receivables, inventories etc.

2. Fixed Assets: Fixed assets are those tangible physical facilities owned by an enterprise, which
are permanent/durable in nature. Fixed assets are not turned over, meaning they are not
converted into cash. For example: Land and building, machinery, tools, equipments etc.

3. Intangible Assets: These assets do not exist in physical form but are notional possessions
owned by an enterprise. These assets generally don’t have real money value but are
important for a company. For example: patents, goodwill, trade-mark etc.

Liabilities:

1.Current liabilities : Those obligations of a company which are payable on demand or within a
period of less than 1 year from the date of the balance sheet.

2.Term Liabilities: A term liability is a debt which matures after a period of 12 months from the
date of the balance sheet

3.Net Worth: The net worth of a company is the owner’s stake in the business. It is a liability of
a company towards its promoters. It is therefore an important item on the balance sheet on
which a lending banker can rely.
4.Specific Reserves and Provisions: Specific Reserves and Provisions are created for the
payment of taxes, dividends and other contingencies.

Ratios:
Ratios Showing Liquidity:

 Current Ratio - Ratio of current assets to current liabilities.

 Quick Ratio - It is an index of the solvency of an enterprise. Basically quick ratio is the ratio of (Current
assets-inventories) and current liabilities.

Ratio showing Financial Stability:

Debt-Equity Ratio - This ratio indicates the relative proportion of shareholders' equity and debt used
to finance a company's assets.

Ratios Showing Profitability:

a.Return on investment ratio- This ratio measures the operating efficiency of a company
without regards to financial structure.

b.Return on Equity Ratio- It is the ratio of net income of a business during a period to its
stockholders' equity during that period.

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Financial Inclusion and Business Correspondents

With the objective of ensuring greater financial inclusion and increasing the outreach of the banking sector, RBI
decided in public interest to enable banks to use the services of NGO’s / SHGs and Micro Finance Institutions
(MFIs) as intermediaries in providing financial and banking services through the use of Business Facilitator and
Correspondent.

Business Correspondent

Under the 'Business Correspondent' Model, NGOs/ MFIs set up under Societies/ Trust Acts, Societies registered
under Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of States, In engaging such
intermediaries as Business Correspondents, banks should ensure that they are well established, enjoying good
reputation and having the confidence of the local people. Banks may give wide publicity in the locality about the
intermediary engaged by them as Business Correspondent and take measures to avoid being misrepresented.

Roles of a Business Correspondent –

 Business correspondents are bank representatives.

 They help villagers to open bank accounts.
 They help villagers in banking transactions. (deposit money, take money out of savings account, loans
etc.)
  The Business Correspondent carries a mobile device.
 The villager gives his thumb impression or electronic signature, and get the money.
 Business Correspondents get commission from bank for every new account opened, every transection
made via them, every loan-application processed etc.

The arrangements with the Business Correspondents shall specify:

 Suitable limits on cash holding by intermediaries as also limits on individual customer payments and
receipts.
 The requirement that the transactions are accounted for and reflected in the bank's books by end of day
or next working day.
 All agreements/ contracts with the customer shall clearly specify that the bank is responsible to the
customer for acts of omission and commission of the Business Facilitator/ Correspondent.

Redressal of Grievances in regard to services rendered by Business Facilitators/ Correspondents

 Banks should constitute Grievance Redressal Machinery within the bank for redressing complaints
about services rendered by Business Correspondents and Facilitators and give wide publicity about it
through electronic and print media.
 The name and contact number of designated Grievance Redressal Officer of the bank should be made
known and widely publicized. The designated officer should ensure that genuine grievances of
customers are redressed promptly.
 The grievance redressal procedure of the bank and the time frame fixed for responding to the
complaints should be placed on the bank's website.
 If a complainant does not get satisfactory response from the bank within 60 days from the date of his
lodging the compliant, he will have the option to approach the Office of the Banking Ombudsman
concerned for redressal of his grievance/s.

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Inflation : An Overview
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When
the general price level rises, each unit of money buys fewer goods and services.Inflation reflects a reduction in the
purchasing power per unit of money.

Inflation occurs due to an imbalance between demand and supply of money, changes in production and distribution cost or
increase in taxes on products. When economy experiences inflation, i.e. when the price level of goods and services rises, the
value of currency reduces. This means now each unit of currency buys fewer goods and services.

It has its worst impact on consumers. High prices of day-to-day goods make it difficult for consumers to afford even the
basic commodities in life. This leaves them with no choice but to ask for higher incomes. Hence the government tries to keep
inflation under control.
Contrary to its negative effects, a moderate level of inflation characterizes a good economy. An inflation rate of 2 or 3% is
beneficial for an economy as it encourages people to buy more and borrow more, because during times of lower inflation,
the level of interest rate also remains low. Hence the government as well as the central bank always strive to achieve a
limited level of inflation.

Many developing countries use changes in the Consumer Price Index (CPI) as their central measure of inflation. India used
WPI as the measure for inflation but now on basis of Urjit Patel recommendations, new CPI(combined) is declared as the
new standard for measuring inflation ( April 2014).

There are several variations in inflation:

Deflation : When the general level of prices is falling. This is the opposite of inflation.
Hyperinflation : Unusually rapid inflation. In extreme cases, this can lead to the breakdown of a
nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in
1923, when prices rose 2,500% in one month.
Stagflation : It is the combination of high unemployment and economic stagnation with inflation. This
happened in industrialized countries during the 1970s, when a bad economy was combined with
OPEC raising oil prices.In recent years, most developed countries have attempted to sustain an
inflation rate of 2-3%.
Recession : A period of general economic decline; typically defined as a decline in GDP for two or more consecutive
quarters.A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline
in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long
enough it is often then classified as a depression.

Depression : A depression is a severe economic catastrophe in which real gross domestic product (GDP) falls by at least
10%. A depression is much more severe than a recession and the effects of a depression can last for years. It is known to
cause calamities in banking, trade and manufacturing, as well as falling prices, very tight credit, low investment, rising
bankruptcies and high unemployment.

Causes of inflation
Inflation is the result of two sets of factors :

Cost-Push Inflation
Cost-push inflation basically means that prices have been "pushed up" or increased by increases in costs of any of the four
factors of production (labor, capital, land or entrepreneurship).

(Aggregate supply is the total volume of goods and services produced by an economy at a given price level.)When there is a
decrease in the aggregate supply of goods and services due to an increase in the cost of production, we have cost-push
inflation. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation).

Demand Pull inflation

A situation where the demand for goods and services rises faster than the supply of goods and services. This excess
demand increases the prices of the goods and services hence creating inflation.Can be simply said as “ Too much money
chasing too few goods ”.Some factors that cause this demand pull inflations are excessive foreign investment,expansionary
fiscal policy e.g increase in government expenditure), expansionary monetary policy( eg. Increase in money supply),easy
access to credit , deficit financing and others.

Some of the most important measures that must be followed to control inflation are:

1. Fiscal Policy: Reducing Fiscal Deficit

2. Monetary Policy: Tightening Credit

3. Supply Management through Imports

4. Incomes Policy: Freezing Wages.

1. Fiscal Policy: Reducing Fiscal Deficit:

Fiscal policy means how a Government raises its revenue and spends it. If the total revenue raised by the
Government through taxation, fees, surpluses from public undertakings is less than the expenditure it incurs on buying goods
and services to meet its requirements of defence, civil administration and various welfare and developmental activities, there
emerges a fiscal deficit in its budget.To check inflation the Government should try to reduce fiscal deficit. It can reduce
fiscal deficit by curtailing its wasteful and inessential expenditure. In India, it is often argued that there is a large scope for
scaling down non-plan expenditure on defence, police and General Administration and on subsidies being provided on food,
fertilizers and exports.

2. Monetary Policy: Tightening Credit:

Monetary policy refers to the adoption of suitable policy regarding interest rate and the availability of credit. Monetary
policy is another important measure for reducing aggregate demand to control inflation. It affects the cost of credit through
interest rate.The higher the rate of interest, the greater the cost of borrowing from the banks.Other tools of monetary policy
like SLR, CRR, Repo rate ,Reverse Repo rate, open market opertions are use to control inflation in the economy by draining
the liquidity from the market.

3. Supply Management through Imports:

To check the rise in prices of food-grains, edible oils, sugar etc., the Government has often taken steps to increase imports of
goods in short supply to enlarge their available supplies.When inflation is of the type of supply-side inflation, imports are
increased.To increase imports of goods in short supply the Government reduces customs duties on them so that their imports
become cheaper and help incontaining inflation.

4. Incomes Policy: Freezing Wages:

Another anti-inflationary measure is the avoidance of wage increases.When cost of living rises due to the initial rise in
prices, workers demand higher wages to compensate for the rise in cost of living.By freezing wages of the employee can
helpful in controlling inflation.

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Insurance System in India - An Overview

History of Insurance Sector -
The oldest existing insurance company in India is the National Insurance Company , which was founded in 1906,
and is still in business.

The largest life-insurance company in India, Life Insurance Corporation of India is still owned by the government
and carries a sovereign guarantee for all insurance policies issued by it.

In the year 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the
insurance business.

The Government of India issued an Ordinance on 19 January 1956 nationalizing the Life Insurance sector and
Life Insurance Corporation came into existence in the same year.
The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business
on 1 January 1973.

Insurance Repository
On 16th September 2013, IRDA launched 'Insurance Repository' services in India. It is a unique concept and first
to be introduced in India. This system enables policy holders to buy and keep insurance policies in
dematerialized or electronic form. Policy holders can hold all his insurance policies in an electronic format in a
single account called electronic insurance account (eIA). Insurance Regulatory and Development Authority has
issued licenses to five entities to act as Insurance Repository:

NSDL Database Management Limited, Central Insurance Repository Limited ( CIRL ), SHCIL Projects Limited,
Karvy Insurance repository Limited, CAMS Repository Services Limited

The Insurance Act of 1938 was the first legislation governing all forms of insurance to provide strict state control
over insurance business.Life insurance in India was completely nationalized on 19 January 1956, through the Life
Insurance Corporation Act. All 245 insurance companies operating then in the country were merged into one
entity, the Life Insurance Corporation of India.

The government then introduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-
regulating the insurance sector and allowing private companies. Furthermore, foreign investment was also
allowed and capped at 26% holding in the Indian insurance companies.(Current 49%).

The primary regulator for insurance in India is the Insurance Regulatory and Development Authority (IRDA) which
was established in 1999 under the government legislation called the Insurance Regulatory and Development
Authority Act, 1999.

Life Insurance Corporation -

Life Insurance in India was nationalised by incorporating Life Insurance Corporation (LIC) in 1956. All private life
insurance companies at that time were taken over by LIC.
In 1993, the Government of India appointed RN Malhotra Committee to lay down a road map for privatisation of
the life insurance sector.

Types of Life Insurance in India

Term Insurance Policies -

The policy holder does not get any monetary benefit at the end of the policy term except for the tax benefits he or
she can choose to avail of throughout the tenure of the policy. In the event of death of the policy holder, the sum
assured is paid to his or her beneficiaries.

Money-back Policies
Money back policies are basically an extension of endowment plans wherein the policy holder receives a fixed
amount at specific intervals throughout the duration of the policy. In the event of the unfortunate death of the
policy holder, the full sum assured is paid to the beneficiaries.

Unit-linked Investment Policies (ULIP)

Unit linked insurance policies again belong to the insurance-cum-investment category where one gets to enjoy
the benefits of both insurance and investment. While a part of the monthly premium pay-out goes towards the
insurance cover, the remaining money is invested in various types of funds that invest in debt and equity
instruments. ULIP plans are more or less similar in comparison to mutual funds except for the difference that
ULIPs offer the additional benefit of insurance.

Pension Policies
Pension policies let individuals determine a fixed stream of income post retirement.

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FDI and Insurance

To understand what FDI in insurance means, one must know what FDI actually means, what happens when a
country's sector accepts investments from another country.

Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or
company of another country, either by buying a company in the target country or by expanding operations of an
existing business in that country.

What is the state of India’s Insurance Industry?

The Indian insurance industry seems to be in a state of flux.
After a decade of strong growth, the Indian insurance industry is currently facing severe headwinds owing to
reasons like:
  Slowing Growth
 Rising Costs
 Reforms being stalled
 Worsening distribution structure

To understand this better, let us have a look into IRDA’s (Insurance Regulatory and Development Authority)
report on Indian Insurance Industry landscape for the 10 year period between 2010 and 2010.

What are the ultimate benefits of increased FDI in Insurance sector?

1. Insurance products: Private as well as government insurers will benefit from the proposed hike of FDI;
these companies will offer better and wide range of insurance products to customers at larger
competitive prices.
2. Smaller Companies: FDI will help smaller insurance companies to break-even faster and help
monetize (convert into currency) the holdings of the promoters of the older life insurance companies.
3. Capital inflow: Immediate capital inflows of $2 billion and long term inflows of about $10 billion can be
expected.
4. Aggression: The industry has been cautious in selling products which are capital intensive, it will be
able to become more aggressive.
5. Technology: Insurers will not just get capital but also technology and product expertise of the foreign
partner who is the domain expert.
6. New Players: We can expect about 100 life and non-life insurance companies to serve a market of our
size. Increasing FDI could see 25-30 new insurers entering the market.
7. State-Run Companies: People in the country have more faith on government insurance companies and
less on private ones, this hike will benefit the state-run companies more than the private ones.
8. Penetration: With the population of more than 100 crores, India requires Insurance more than any other
nation. However, the insurance penetration in the country is only around 3 percent of our gross domestic
product. Increased FDI limit will strengthen the existing companies and will also allow the new players
to come in, thereby enabling more people to buy life cover.
9. Employment: With more money coming in, the insurance companies will be able to create more jobs to
meet their targets of venturing into under insured markets through improved infrastructure, better
operations and more manpower.
10. Level Playing Field – With the increase in foreign direct investment to 49 percent, the insurance
companies will get the level playing field. So far the state owned Life Corporation of India controls
around 70 percent of the life insurance market.
11. Increased Capital Inflow – Most of the private sector insurance companies have been making
considerable losses. The increased FDI limit has brought some much needed relief to these firms as the
inflow of more than 10,000 crore is expected in the near term.This could go up to 40,000 crore in the
medium to long term, depending on how things pan out.
12. Favorable to the Pension Sector –If the pension bill is passed in the parliament then the foreign direct
investment in the pension funds will also be raised to 49 percent. This is because the Pension Fund
Regulatory Development Bill links the FDI limit in the pension sector to the insurance sector.
13. Consumer Friendly – The end beneficiary of this amendment will be common men. With more players
in this sector, there is bound to be stringent competition leading to competitive quotes, improved
services and better claim settlement ratio.

Types of Frauds in Insurance Sector

There are many but following are Main.

Premium Diversion

 Premium diversion is the embezzlement of insurance premiums.

 It is the most common type of insurance fraud.
 Generally, an insurance agent fails to send premiums to the underwriter and instead keeps the money
for personal use.
 Another common premium diversion scheme involves selling insurance without a license, collecting
premiums and then not paying claims.

Fee Churning
  In fee churning, a series of intermediaries take commissions through reinsurance agreements.
 The initial premium is reduced by repeated commissions until there is no longer money to pay claims.
 The company left to pay the claims is often a business the conspirators have set up to fail.
 When viewed alone, each transaction appears to be legitimate—only after the cumulative effect is
considered does fraud emerge.

Asset Diversion

 Asset diversion is the theft of insurance company assets.

 It occurs almost exclusively in the context of an acquisition or merger of an existing insurance company.
 Asset diversion often involves acquiring control of an insurance company with borrowed funds. After
making the purchase, the subject uses the assets of the acquired company to pay off the debt. The
remaining assets can then be diverted to the subject

Thanks Padhaku!!!

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