Friday, February 13, 2015

Automated Teller Machine (ATM)

Automated Teller Machine (ATM) is a computerized machine (specialized computer) that provides the customers of banks the facility to access their accounts for dispensing cash and to carry out other financial (e.g., remittances) as well as non-financial (e.g., balance check) transactions, without visiting the bank branch.

Services / Facilities provided by ATMs -
  • Cash Withdrawal
  • Account Information
  • Cash Deposit (not permitted at WLAs)
  • Regular Bill Payment
  • Purchase of Vouchers
  • PIN change
  • Mini / Short Statement
  • Cheque book request
  • Loan Account Enquiry, etc.

Classification
ATMs can be classified depending on the owner and operator -

1.  Bank-owned ATM 
These are owned and operated by individual banks.

2.  White Label ATM (WLA)
These type of ATMs are set up, owned and operated by non-bank entities (e.g., NBFCs). WLAs are authorized under Payments and Settlement Systems Act, 2007 by RBI. These have following features -
  • Logo displayed on the machine or premises will be of WLA Operator's. However, customers can use these ATMs, as of using other bank ATMs (bank other than card issuing bank)
  • Cash deposit is not permitted in the WLA machine (as of now).
3.  Brown Label ATM (BLA)
These type of ATMs are set up and owned by a Service provider, but cash management (operation) and connectivity is provided by a sponsor bank (brand of this bank is used on the ATM). 

By using BLAs, banks have the opportunity to cut the huge cost of setting up of an ATM (bank-owned ATM)


Note -
ATMs - bank (owner), bank (operator)
WLAs - non-bank (owner), non-bank (operator)
BLAs - non-bank (owner), bank (operator)


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FERA and FEMA

Foreign Exchange Regulation Act (FERA), 1973
Government of India (PM was Smt. Indira Gandhi) enacted Foreign Exchange Regulation Act (FERA) in 1973 , which came into force w.e.f. January 1, 1974, to regulate all Indian exchanges or dealings with foreign countries.

At the time of legislation of the law, India had acute shortage of foreign exchange (forex). The government then tried to restrict (very strictly) the exchanges, or dealings of India with foreign countries. But the rules and regulations were so stringent that it had a great impact on the import and export of currency.

There were several issues with this act, like -
  • Law violators were treated as criminal offenders (instead of civil offenders)
  • Wide power on the hand of Enforcement Directorate (E.D) to arrest any person, seize any document (Corporate world found themselves at the mercy of E.D.!)
  • Control everything that was specified, relating to foreign exchange, aimed at minimizing dealings in forex and foreign securities, etc.

Foreign Exchange Management Act (FEMA), 1999
FERA was too strict on regulating the foreign exchanges, that acted like an obstacle in foreign trade, and had become incompatible with the pro-liberalization policies of government.

Hence government of India, under PM Shri. Atal Bihari Vajpayee repealed the FERA Act, and introduced FEMA in 1999. This time, instead of "regulating" the foreign exchange, government tried to "manage" it (with simpler norms).

FEMA has brought a new management regime of foreign exchange with the new framework of the World Trade Organization (WTO). Also, it brought with it the Prevention of Money Laundering Act, 2002, w.e.f. July 1, 2005.


Difference between FERA and FEMA


FERA
FEMA
Objectives
To conserve forex and to prevent misuse
To facilitate foreign trade and maintain forex
Provisions
Consisted of 81 sections with great complexity
Consists only 49 sections and is much simpler
Power of Search & Seize
Wide power on the hands of a police officer (not below the rank of Deputy SP)
Power curtailed to a great extent
Violation
Criminal offence, and was not compoundable (charges could not be dropped)
Civil offence, and is compoundable (charges can be dropped)
Residential status
only citizenship was the criteria to determine the residential status of a person
More than 6 month stay in India is the criteria to determine the residential status of a person



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Thursday, February 12, 2015

Cards - Debit, Credit, Prepaid Cards

Instead of carrying and using cash, you can use cards for all your financial transactions. Hence, these are known as Plastic Money.

According to the issuance, usage and payments, Cards can be classified into 3 types -

1.  Debit Cards - These are issued by banks, which are linked to a bank account (meaning you need a bank account (savings, current, etc.) before having a Debit card). Debit cards are also known as ATM cards.

Note that you need to have balance in your account, before you make any financial transaction. These can be used for several purposes like -

  • withdraw cash from an ATM
  • purchase goods and services at Point of Sale (POS) / E-commerce (online - domestic & international; however for international transaction, it needs to be enabled by bank)
  • fund transfer / remittances (only domestic), etc.

2.  Credit Cards - These are issued by banks or other institutes approved by RBI. There is a credit limit on transactions. These may or may not be linked to a bank account.

Note that you can make transactions, even if you don't have balance in your account (if linked with bank account), subject to a credit limit approved by the issuer of the credit card. This can be thought as a loan / advance from the issuer, which you need to pay back after a certain period of time. Use of Credit cards are same as that of the Debit cards.


3.  Prepaid Cards - These are issued by banks or non-banks, where value is paid in advance. There are several forms of prepaid cards, like Smart cards or Chip cardsInternet walletsMobile wallets, etc.

Prepaid cards can be further classified into two types -
  • Issued by banks - also known as Open System Prepaid Cards, which are issued by banks. These are similar to Debit cards in usage, but you don't need a bank account to get this type of card. You just need to pay in advance, with a maximum limit of Rs. 1 lakh (previous limit Rs. 50,000)
  • Issued by authorized non-bank entities - also known as Semi-Closed System Prepaid Cards, which are issued by authorized non-bank entities. There are some restrictions on the usage of these cards - can be used only for purchase of goods and services at POS / E-commerce (online) and for domestic remittances, but cannot withdraw money from ATMs.
    Also, you don't need a bank account, but need to pay in advance to the non-bank entity, with a max. limit of Rs. 1 lakh.

# Reader's Question
Can Credit Card be issued without bank account?
(Now after reading the article, you already know the answer)
Credit cards may or may not be linked with a bank account, meaning you don't need to have a bank account, to be issued with a Credit Card. However, before issuing you a Credit card, the issuing bank or other RBI approved institutions (e.g. NBFCs) will verify your credibility.

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Inflation - Part III

Reflation
If the government tries to increase Inflation rate to stimulate economy, then it will be known as Reflation. It can be done by -
  • Increasing money supply to the market
  • Reducing taxes, etc.
When Reflation is needed?
When the economy is in highly deflated state, i.e., in Deflation, where price level of commodities is too low, or value of money is too high (meaning you can buy a lot of goods with small amount of money!)

Disinflation
It is the opposite of Reflation. Disinflation process will be used by the government, if it tries to decrease the Inflation rate to recover the economy from a high Inflation state. It can be done by -
  • Decreasing money supply to the market
  • Increasing taxes, etc. 
When Disinflation is needed?
When the economy is in highly inflated state, i.e., in Inflation, where price level of commodities is too high, or value of money is too low (meaning you can buy a small amount of goods with a lot of money!)


Note that Reflation and Disinflation are the process of increasing and decreasing the Inflation rate, respectively. But Inflation and Deflation are the state of economy, where the price level of goods are too high and too low, respectively.

For example, suppose Inflation of January is 5 % (Inflation) and February is 4 % (Inflation). Then you can say that the price is disinflated by 5 - 4 = 1 %, but is still in Inflated state (in Inflation) in February.
Now suppose Inflation of January is 1 % (Inflation) and February is -2 % (Deflation). Then you can say that the price is disinflated by 1 - (-2) = 3 %, and is in Deflated state (in Deflation) in February.


There are two extreme cases of Inflation -
  • Hyperinflation - This is an extreme situation of Inflation in an economy, when the country experiences very high price level of goods (which is rapidly accelerating), and the real value of money is very low (which is rapidly depreciating).
    In this situation, people try to hold foreign currencies (e.g., USD), because their local currency has very low value.
  • Stagflation - This is an extreme situation of Inflation, which is associated with high unemployment (stagnant inflation). It raises a dilemma for government, because reducing inflation will rise unemployment, while reducing unemployment will increase inflation.

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Wednesday, February 11, 2015

Inflation - Part II (Price Indices - PPI, WPI, CPI)

Measurement of Inflation
Price indices are used to measure the relative price changes (of goods and services) in a region (generally a country) during a specific period of time (e.g., financial year, or quarter, or month).

With the price indices, we comprehend about how much the price of goods and services has increased (Inflation) or decreased (Deflation) from a fixed normal year, known as base year (with respect to this base year, we calculate how much increase or decrease in prices happened in this current year).

Price indices are generally used to measure the cost of living in order to determine the wage increases necessary to maintain a constant standard of living.

Price Indices
Goods and services are provided to the consumer by the producer. It follows several stages / levels in between -
  • producer level (produced, or manufactured) - PPI
  • wholesale level (at wholesale market, before going to the retail market) - WPI
  • retail / consumer level (at retail market, from where consumers buy) - CPI

Wholesale Price Index (WPI)
WPI is used to track prices of goods at the wholesale stage (meaning goods sold in bulk, rather that retailed), and traded between organizations, before going to consumers.

It is practically impossible to find price changes of all the goods traded in an economy (millions of goods!). So it is logical to take a sample set, or 'basket of goods' (e.g., 676 commodities, or goods) to measure the inflation (few important goods taken for measuring price changes).

Then determine a base year (e.g., 2004-05, 2010-11), with respect to which the current inflation will be measured. WPI indicator tracks the price movement of each commodity individually, and then determine through the averaging principle (Methods like Laspeyres formula, Ten-day Price Index, etc. are used)

Note that all commodities are classified into 3 groups, and then their weighted average is taken for measuring WPI -

  • Primary Articles (e.g., food, non-food, mineral, etc.) - 20.1 % of total weight
  • Fuel & Power (Coal, Mineral Oil, Electricity, etc.) - 14.9 % of total weight
  • Manufactured Articles (food products, beverages, woods, paper, chemicals, machinery, transport, etc.) - 65 % of total weight

Indian wholesale prices increased by 0.11 % in December 2014 after being flat (0 %) in November 2014. 


Consumer Price Index (CPI)
While WPI is calculated in wholesale stage, CPI is determined at retail stage, where consumers are directly involved. Hence, CPI method better measures the effect of inflation on general public. RBI adopted CPI as the key measure for determining Inflation situation of economy, on recommendation of Urjit Patel committee.

CPI measures changes in prices, paid by consumers for a basket of goods (similar to WPI, but here retail goods, instead of wholesale goods).

There are 3 broad types of CPIs - (for different type of consumers; new CPI system of 2012)

  • CPI for Urban population, known as CPI (Urban)
  • CPI for Rural population, known as CPI (Rural)
  • Consolidated CPI for Urban and Rural, which is based on CPI (Urban) and CPI (Rural) - key measure for CPI
CPI in India decreased to 144.90 Index Points in December 2014 from 145.50 in November.


Producer Price Index (PPI)
PPI is used to track pure price changes at producer level for goods as well as servicesPPI prices of many products and some services are determined form first commercial transaction.
Note that in contrast to WPIPPI doesn't contain tax components, keeping inflation free of tax fluctuations.

The government of India has set up (Sep, 2014) a committee (13 members), headed by Professor B.N.Goldar, to devise PPI for Indian economy. It is an international standard, which is followed by major economies (e.g., USA) of the world.

Why devising PPI in India?
  • Currently, there is no index tracking inflation in service sector, that contributes about 55 % to India's GDP (note that WPI doesn't track services sector in India)
  • PPI tracks inflation excluding tax components. It will help to track actual change in prices (note that WPI, CPI, both includes tax components)


Disclaimer - This article only gives a basic idea, just for learning purpose. No figure or content mentioned here to be considered as accurate.


(to be continued..)


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Inflation - Part I

Suppose, you lived in "peace" (in context of your spending) in the year 2010, when you bought vegetables or fruits (or any other commodity) in much less price (than present). But at present i.e. in 2015, the prices of the same things have gone up which means you have to spend much more, than you used to spend in 2010. This phenomenon is known as Inflation.

And if the government thinks that the year 2010 was "ideal" year to compare the prices with, then the year can be determined as base year (fixed by government; and generally changes with trends in economy throughout periods of time)

For example, if in 2010 (suppose fixed as base year), the price of potato was Rs. 20 / kg, but the price has increased significantly throughout the period, becoming Rs. 25 / kg in 2015. Then the inflation would be simply (25 - 20) / 20 x 100 % = 25 %

Note carefully, we cannot have a clear picture of overall inflation by taking only one commodity. But then, we cannot even take all commodities (millions!) to measure inflation. Therefore, it is logical to take few (say 400 or 600, only a figure) most used and important commodities in market to measure inflation.


Also note that the price of commodities can be less than the base year. then it will be known as Deflation (opposite of Inflation).


Stages of Inflation

Depending on the intensity of inflation, we can have several stages -

  • Creeping Inflation - (slow) - 2 - 4 % inflation
  • Trotting Inflation - (moderate) - 4 - 10 % inflation
  • Galloping Inflation - (fast) - 10 - 20 % inflation
  • Hyper Inflation - (very fast) - more than 20 % inflation

Types of Inflation

Inflation can occur for several reasons, hence there are several types of inflation -
  • Demand-Pull Inflation -
    This type of inflation occurs, when the total demand for goods and services exceeds the available supply in the market (meaning more goods needed, but limited stock). As an effect, prices of those commodities increase. It is also known as Excess-Demand Inflation.
  • Pricing Power Inflation -
    This type of inflation occurs, when business houses or industries increase prices of commodities to increase their profit margin significantly. Generally, they have few or no competitors in their market segment, making their business into monopoly. It is also known as Administered Price Inflation or Oligopolistic Inflation.
  • Cost-Push Inflation -
    This type of inflation occurs, due to the increase in prices of raw materials, wage of employees, etc. making the ultimate product more costly. For example, price of car will rise, if the price of raw materials to make a car increases.
  • Sectoral Inflation -
    This type of inflation occurs in a sector, due to the rise in prices in another sector, on which the sector is dependent on. For example, ticket price of bus will increase due to the increased price of diesel.

(to be continued..)


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Loans against Deposits

Situational Question
A customer has made a Fixed Deposit of Rs. 10 lakh in your branch. He comes in your branch and asks you to break his FD, because he needs some urgent money. What will you do?

You need to make him aware of Loans against Deposits, and the benefits involved in it. Tell him that he can get his urgent money, without breaking the Fixed Deposit. The loan you can provide him against the FD, will bear less interest, than the traditional loans.

So he has several advantages -

  • No need to break FD, which can be retained for future use (may be for more serious issue)
  • Interest rate charged in Loans against Deposits is much less, than the traditional loans
  • No need to provide other collateral (like mortgages, pledge, etc.), because the FD will act as collateral

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Business Correspondents

In a country, like India, lack of access to banking / financial services is still a major challenge, specially in remote areas of the country. Even up to 65 % of the population is classified as 'Underbanked or Unbanked'.

Therefore, to meet the need of financial inclusion (to reach those population and provide banking services), a new concept of Business Correspondent / Banking Correspondent (BC) came to picture in 2006, to provide services at people's doorstep.

Business Correspondent Agent (BCA)
Business Correspondent Agent is an authorized representative of a bank, who offer banking services to those places, where the bank doesn't have a branch. Hence facilitating traditional banking services is not possible, without the help of business correspondents. BCs oversee the development and functioning of indirect banking channels in their service area.

Note, a BC need not have to affiliated to a single bank, they can provide services from more than one banks. BCs charge a commission from the bank for their services.

Scope / Activities
  • Identification of borrowers
  • collecting and preliminary processing of loan applications, including verification of primary information (generally not authorized to sanction loan)
  • creating awareness and providing financial advice / counselling
  • promoting and monitoring Self Help Groups (SHG), Joint Liability Groups (JLG), etc.
  • collecting small value deposits
  • sale of micro insurance, mutual fund (MF) products, other third party products
  • receipt and delivery of small value remittances, other payment instruments
  • other operations

Eligibility
  • Individuals, like retired bank employees, retired teachers, retired gov. employees, ex-serviceman, etc.
  • NGOs, MFIs set up under Societies / Trust Acts and Section 25 Companies
  • Registered Cooperative Societies
  • Post Offices
  • Companies registered under Indian Companies Act, 1956, with large and widespread retail outlets, excluding NBFCs.
Note that NBFCs are not allowed to work as a Business Correspondents (BC). However, later RBI relaxed the norms and allowed the banks to engage (only) non-deposit taking NBFCs (NBFC-ND) as BCs, subject to some conditions.



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Tuesday, February 10, 2015

Disinvestment

Investment can be thought as the conversion of money into securities / assets (you invest in some company, means you use your money to buy some security, like shares, bonds, debentures, etc.)

Conversely, Disinvestment can be thought as the conversion of securities / assets into money.

Generally, disinvestment is the action of an organization, or government, selling its asset (may be shares, or stocks, or any other security) or its subsidiary. In return, the organization or government gets, or raises money, which it can use for other purpose.

Example
Currently, the government sold 63.16 crore shares (10 % stake) of Coal India Limited (CIL) on January 30, 2015, reducing government stake in CIL to 79.65 % (from 89.65 %). By this disinvestment, government raised Rs. 22,558 crore. (meaning, government sold some of its shares, and raised money against it)

Why Disinvestment by government?
  • Financing the fiscal deficit (to reduce it)
  • Financing large-scale infrastructure development
  • To reduce government debt
  • Any other purpose

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Pledge, Hypothecation, Mortgage, Lien

Securities for loan
If you want a loan from a bank (or any other financial institution), you generally need to provide some kind of security against the loan to the bank. There are several types of securities, against which a bank will offer you a loan -

  1. Pledge - It is used when the bank (or, lender, known as pledgee) takes actual possession of the securities, such as goods, certificatesgolds, etc, (you provide it to bank to avail loan) which are generally movable in nature. Bank keeps the securities with itself, and provide loan to you.
    Bank will return the securities (possession of goods) to you (borrower, known as pledgor), after you repay all the debts (i.e., loan) to the bank. In case you are unable to pay back, then the bank has the right to sell the assets, and recover the loan amount (with interest).

    Example - Gold loans, Jewellry loans, advances against NSC (National Saving Certificates), or loans against any other assets.
  2. Hypothecation - It is used when you (borrower) have the actual possession of the asset, for which you have taken the loan. Generally, this is charged against loans for movable assets, like car, bus, etc. (i.e., vehicle loans). Here, the assets (bus, car, etc.) remain with you, and you are hypothecated to the bank for the loan granted.
    In case you are unable to repay the loan amount, then the bank has the right to sell the asset (bus, car, etc.), (which is possessed by you) and recover the total amount (with interest).

    Example - Car loans, Bus loans, etc.
  3. Mortgage - It is used when you (borrower) have the actual possession of the assets, for which you are granted loan (e.g., house loan), or against which you are granted loan (e.g., house mortgaged). Mortgages are generally those assets, which are permanently attached with Earth surface, like house, land, factory etc.
    In case you are unable to repay the loan amount, the bank has the right to seize and sell the mortgage, and recover the loan amount (with interest).
  4. Lien - It is almost similar to Pledge, except that in case of lien, the lender can only detain the asset/goods until the borrower repays the loan, but have no right to sell the asset, unless explicitly declared in the lien contract. (For a pledge, the lender can sell the asset, if the borrower is unable to pay the loan)

Note the followings -
Movable assets - Pledge, Hypothecation, Lien
Immovable assets - Mortgage

Possessed by lender - Pledge, Lien
Possessed by borrower - Hypothecation, Mortgage



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Monday, February 9, 2015

Appreciation and Depreciation

Each country has its own currency (except some European countries in Eurozone use common currency - 'Euro'), and each currency has its own valuation.

Therefore, for a foreign transaction, there should be a mechanism to convert one currency to another (to know how much of one currency is equivalent to other). The rate is known as Conversion rate, or Exchange rate.

For example, currently (February 9, 2015), 1 US Dollar = Rs. 62.15, or Re. 1 = USD 0.016 is the conversion rate between Indian Rupees (INR) and US Dollar (USD).

Depreciation
Note carefully, that if the conversion rate of INR to USD (USD @ Rs. 62.15) increases (meaning more Indian rupee is needed to buy a US Dollar), then the valuation of Indian Rupee decreases. It means depreciation of Indian Rupees with respect to US Dollar.

Appreciation
Whereas, if the conversion rate of INR to USD decreases (meaning less Indian rupee is needed to buy a US Dollar), then the valuation of Indian Rupee increases. It means appreciation of Indian Rupees with respect to US Dollar.

Example
For example, currently the conversion rate is USD @ Rs. 62.15. So, to buy 100 USD, we need to spend Rs. (100 x 62.15) = Rs. 6215

Now suppose, INR depreciates to Rs. 65 per USD (note 62.15 -> 65 is an increment, but actually the value of INR decreased, meaning more INR needed to buy the same amount of USD). Therefore to buy the same 100 USD, we need to spend Rs. (100 x 65) = Rs. 6500. It means we need to spend more (Rs. 285 more), because of the depreciation of INR to USD.

Similarly, if INR appreciates to Rs. 60 per USD  (note 62.15 -> 60 is a decrement, but actually the value of INR increased, meaning less INR needed to buy the same amount of USD). Therefore to buy the same 100 USD, we need to spend Rs. (100 x 60) = Rs. 6000. It means we need to spend less (Rs. 215 less), because of the appreciation of INR to USD.


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ADR and GDR

Depository Receipts (DR)
A publicly listed (stock exchange listed) company might want to raise money from foreign countries (in contrast to its domestic country). So it will list its securities (stocks or equities) to a foreign country's stock exchange in form of Depository Receipts (DR).

Therefore, DRs are a type of negotiable financial security (usually stocks/equity) by a foreign publicly listed company, which are traded on a local Stock exchange (e.g., american company trading on Bombay Stock Exchange).

Example -
An American company (publicly listed in New York Stock Exchange, or any other stock exchange in USA) might want to raise money from foreign countries (like, India). So, it will list its securities in Indian stock exchanges (may be Bombay Stock Exchange) by means of Depository Receipts. Then Indian investors can invest in these securities.

American Depository Receipts (ADR)
Depository Receipts were first started in USA in late 1920s. DRs issued by any company of USA/America will be known as American Depository Receipts (ADR). ADRs, generally, are traded in US Dollar.

Global Depository Receipts (GDR)
DRs became popular in other parts of the world after its introduction in USA. DRs of all other countries (other than USA) will be known as Global Depository Receipts (GDR).


Issuance of DRs
When a foreign company intends to list its securities on another country's stock exchange, it goes through DR mode. Steps -
  1. The shares of the foreign company (which the Depository Receipts represent) are delivered and deposited with the custodian bank (bank that facilitates the company's DR)
  2. On receipt of the delivery of shares, the custodian bank creates Depository Receipts (DR) and issues to investors in the country (investor's country, not company's country)
  3. These DRs are then listed and traded in the local stock exchange of that country.


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Sunday, February 8, 2015

Small and Payment Bank

Small Banks

The objectives of setting up of Small Banks are to further financial inclusion, by providing -

  • Provision of savings facilities to under-served and un-served sections of the population
  • Supply of Credit to small business units, small farmersmicro and small industries, and other unorganized sector entities, in their limited area of operations, through high technology - low cost operations
Activities of Small Banks -
  1. The area of operations of the small bank will normally be restricted to contiguous districts in a homogenous cluster of states/UTs so that the bank has the 'local feel' and culture. Branch expansion for first 3 years, need RBI's prior approval.
  2. Primarily undertake basic banking activities, like acceptance of deposits and lending to small farmers, small businesses, micro and small industries and unorganized sectors. 
  3. It can also undertake other simple financial activities with the prior approval of RBI.
  4. It cannot set up subsidiaries to undertake non-banking financial services (NBFC) activities.
Capital Requirements -
The minimum paid-up capital is Rs. 100 crore

Funds Deployment -
In view of the inherent risk (since it can lend) of a small bank, it shall be required to maintain a minimum Capital Adequacy Ratio (CAR) of 15 % of its Risk Weighted Assets (RWA) on a continuous basis. However, as small banks are not expected to deal with sophisticated products, the CAR will be computed under simplified Basel I standards.


Payments Bank
The objectives of setting up of Payments Banks are to further financial inclusion, by providing -

  • Small Savings accounts
  • Payments / remittance services to migrant labor workforce, low income households, small businesses, other unorganized sector entities and other users.
Activities of Payment Banks -
  1. They can accept Demand Deposits, but will initially be restricted to hold a maximum balance of Rs. 1,00,000 per individual customer
  2. Issuance of ATM / Debit Cards, but they cannot issue Credit Cards
  3. Payments and remittance services through various channels
  4. They can act as Business Correspondents (BC) of another bank (following RBI guidelines)
  5. Distribution of non-risk sharing simple financial products, like Mutual Funds (MF) units and insurance products, etc.
  6. They cannot undertake lending activities (means cannot disburse loans)
Capital Requirements -
The minimum paid-up capital is Rs. 100 crore.

Funds Deployment -
Apart from amounts maintained as Cash Reserve Ratio (CRR) with RBI, it will be required to invest minimum 75 % of its demand deposits in Statutory Liquidity Ratio (SLR) eligible government securities / T-bills with maturity up to 1 year, and hold maximum 25 % in current and time/fixed deposits with other Scheduled Commercial Banks (SCBs) for operational purposes and liquidity management.


Small Banks vs. Payment Banks
  1. Small Banks can accept demand and time deposits from public as commercial banks do (Savings, Current, Fixed, Recurring deposits, etc.)
    But, Payment Banks can take only demand deposits (Savings and Current deposits), and cannot issue Credit cards (however, can issue Debit cards)
  2. Small Banks can give loans only to small business units, small farmersmicro and small industries, and other unorganized sectors, but not to large industries.
    But, Payment Banks cannot give any type of loans to public, but can invest in government securities or T-bills.
  3. The target of Small Banks is to supply credit to small business units, small farmersmicro and small industries, and other unorganized sector entities, in their limited area of operations. And provisions for savings for poor people.
    The target of Payment Banks is payments / remittance services to migrant labor workforce, low income households, small businesses, other unorganized sector entities, and savings for poor people.

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Nationalized Banks and Public Sector Banks

Public Sector Banks (PSBs)
If the government holds majority stake, i.e,. more than 50 % stake of an enterprise, then it is known as Public Sector Unit (PSU). Government is the owner of the PSU, and is responsible for the managerial control of the enterprise.
Similarly, if the majority stake (>50 %) of a bank is held by the government (generally, central government), then it is known as Public Sector Bank (PSB).

To know whether a bank (or any enterprise) is a public sector bank, just take a note on the stake of government.

Nationalized Banks
If some private entity or individual holds the majority stake (>50 %) of a bank, then it is a Private Sector Bank. Now if the government buys the majority stake of the private bank, and take the managerial control of it, then it will be known as Nationalized Bank, and the process will be known as Nationalization.

Note that the bank earlier was a private bank, but after the nationalization process, it became a Nationalized Bank. Hence to know whether a bank is a nationalized bank, just take a note on the history of the bank (private -> public) and the stake of government in it.

Nationalized Bank vs. PSB
Now it is evident that a nationalized bank is always a public sector bank (PSB), because the government (in turn the public) owns it (>50 % stake), but a PSB may not be a nationalized bank (if the government itself creates the bank, with majority stake).

History of Nationalization
  • The Reserve Bank of India (RBI) was nationalized with effect from January 1, 1949, on the basis of Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
  • The Central government entered the banking business with the nationalization of the Imperial Bank of India in 1955 (60% stake bought by RBI), and renamed State Bank of India (SBI) under State Bank of India Act, 1955. In 2008, government acquired RBI's stake in SBI to remove any conflict of interest, because RBI is the banking regulatory authority.
  • The 7 other state banks became the subsidiaries of SBI, after being nationalized on 1959, under State Bank of India (Subsidiary Banks) Act, 1959. Currently 2 SBI subsidiaries are merged, making total 5 SBI associate banks.
  • The major nationalization took place in July 19, 1969 under former PM Smt. Indira Gandhi, under Bank Nationalization Act, 1969. 14 major banks were nationalized at that time, making 84 % of total branches coming under government control. However, on February 10, 1970, the Supreme Court held the Act void on the grounds that it was discriminatory against the 14 banks and that the compensation proposed to be paid was not fair compensation.

    A fresh Ordinance was issued on February 14, which was later replaced by Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
  • The next nationalization process took place in 1980, making 6 other banks nationalized. 91 % of total branches came under government control, through Banking Companies (Acquisition and transfer of Undertakings) Ordinance, 1980.

Which banks are Nationalized Banks?
This is a debated topic. If we consider the definition of Nationalized banks, then the criteria is - the bank need to be a private bank prior nationalization. This criteria is satisfied by RBI, SBI, SBI associates and all other banks that are nationalized in 1969 and 1980 (total 14 + 6 - 1 = 19, '-1' because New Bank of India is merged with Punjab National Bank in 1993). 

But it is better not to call RBI, SBI, or SBI associates as a Nationalized Banks. Because, they draw power from different Acts, like -
  • RBI - Reserve Bank of India (Transfer to Public Ownership) Act, 1948
  • SBI - State Bank of India Act, 1955
  • SBI Associates - State Bank of India (Subsidiary Banks) Act, 1959
Banks that are nationalized in 1969 and 1980 draw power from Banking Companies (Acquisition and transfer of Undertakings) Act of 1969 and 1980, are known as Nationalized Bank

These total 19 banks are designated as Nationalized Banks by RBI in their website too -

Also note that IDBI Bank Ltd. is denoted as Other PSBs in the website. 

Bharatiya Mahila Bank (BMB) is a government-owned bank from the beginning. So there is no process of nationalization involved. Hence it is a Public Sector Bank.


Now we can calculate the total number of Public Sector Banks (PSB) as -
  • SBI and SBI Associates - 6 banks
  • Nationalized banks (both 1969 & 1980) - 19 banks
  • IDBI bank - 1 bank
  • BMB bank - 1 bank
Total = 6 + 19 + 1 + 1 = 27 PSBs

This was the calculation till March 31, 2017.
But w.e.f April 1, 2017, the 5 associate banks of SBI and Bharatiya Mahila Bank (BMB) are merged with SBI. 
Therefore, as on 18/06/2017, the number of Public Sector Banks (PSB) is 27 - 5 - 1 = 21


Nationalization vs. Privatization
Nationalization is the process for a government to expand its economic resources and power, whereas Privatization is the process where government-owned companies are spun off into the private sector.


SBI Merger with Associate Banks and BMB
Read this article of SBI Merger




Disclaimer - This topic is a much debated topic. You can have your own opinion. There is no proper definition or guideline, by which you can determine  whether a PSB is a nationalized bank, or not. Any kind of debate regarding this topic is welcome.

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SWIFT codes

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a secure, reliable, standardized network (SWIFTNet network) that facilitates financial institutions to transfer and receive financial transaction information worldwide.

It is a standard format of Business Identifier Codes (BIC) for both financial (BIC) and non-financial (known as Business Entity Identifier, or BEI) institutions, approved by International Organization for Standardization (ISO) - ISO 9362.

Why SWIFT code?
Financial Institutions need to have an unique identifier code, so that they can be uniquely identified and facilitate transactions (like a PIN code, need to know the destination and source of the transaction being made).
Think how many banks are their in the world, and how many branches in each bank. And also, different country has its own standard for financial transaction. Therefore it is necessary to make a common standard, which will be followed by financial institutions situated in different countries. For this purpose of international wire transfers or worldwide financial communication, SWIFT was founded in Brussels in 1973, supported by 239 banks in 15 countries.

SWIFT code
The SWIFT code is of or 11 characters - (AAAA BB CC DDD)
  • First 4 characters - Bank codes (only alphabets)
  • Next 2 characters - Country codes (only alphabets) (ISO 3166-1 followed)
  • Next 2 characters - Location code (alpha-numeral)
  • Last 3 characters - Branch code (alpha-numeral) (optional, if left blank, or 'XXX' then means primary office, i.e., head office)
Note that, 8 character SWIFT code (last 3 characters of Branch code is absent, or 'XXX') is intended for primary office of the bank, whereas 11 character is intended for particular bank branches.

India in SWIFTNet
India was the 74th country to join the SWIFT network on December 2, 1991. It has the following features -
  • It is available worldwide, 24x7
  • standard message formats for transactions, that enable members to avoid language and interpretation problems and permit the automated handling of messages
  • delivery of a message is very 'swift'
  • ensures a high-level of security, while transmitting messages
  • assumes financial liability for the accuracy, completeness and timely delivery of all validated messages
SWIFT Network
There is a SWIFT gateway for each country, known as SWIFT Access Point (SAP). Individual user's terminals are connected with this SAP, through leased lines with Public Switched Telephone Network (PSTN) as backup
The SAPs are connected to the Regional Processors, which are connected online to mother operating centers in USA and Netherlands, from where the messages are distributed to the destination addresses indicated in each SWIFT message.


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Recession and Subprime Lending

Recession
For a healthy economy, a country needs to have smooth economic activities of production, distribution and consumption of goods and services at all levels. But what if all these activities drastically reduced (due to some reason) to a very low-state and continues to be in that state for a long time?
This kind of slowdown or a massive contraction in economic activities, is known as Recession. It may last for some quarters, which have a great adverse effect on the growth of an economy (making negative GDP growth, may be). Other adverse effects, like - 
  • Unemployment
  • Drop in Stock Market
  • Decline in Housing Market
  • Business losses
  • Social effects, like low living standards, low wages, etc.
The technical indicator of a recession may be two consecutive quarters of negative GDP growth. Recessions can occur for excessive subprime lending, as described below.

Subprime Loans
A bank generally follows a credit scoring system to determine borrowers eligibility for a loan. If a borrower doesn't have a good credit history, then the bank can deny him/her a loan. But if the bank decides to allow him/her a loan (even with that limited credit history), then the loan is known as subprime loan.
This type of loan carries more credit risk, and therefore carries higher interest rate. Think what will happen, if he/she eventually cannot pay back the loan (with extra interest rate on it!)

US Subprime Crisis of 2007-09
US banks started to lend subprime loans to the low credit borrowers, with houses, or properties as mortgage. They thought that if the borrowers become unable to pay back, then they could seize the properties and sell in high prices to recover the loans. 

But what happened is the prices of houses/properties declined drastically, leading to mortgage delinquencies and devaluation of housing-related securities. This led the banks to become bankrupt (e.g., Lehman Brothers), because they couldn't recover the amount of their huge subprime lending against mortgage securities.

Current Recession in Venezuela
Due to political instability and falling oil prices, Venezuelan economy (highly dependent on oil exports) shrank by 2.8 % in 2014, while inflation topped 64 %. It led Venezuela to fall in recession.


Hope this post will help you understand the concepts.
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