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Definition of Banking

Banking is defined as accepting, for the purpose of lending and investments, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Over the years the nature and scope of services provided by banks have changed and expanded. At the same time, the primary activities of the bank continue as stated above. b

Types of Banking
The banks can be categorized into different types based on the services offered to the customer. These banks specialize in different lines of business. Some of the most common types of banks are !etail banks "ommercial or "orporate banks #nvestment banks "entral banks

Retail bank is a bank that $orks $ith consumers, other$ise kno$n as %retail customers%. !etail banks provide basic banking services to the general public, including "hecking and savings accounts "ash &eposits Safe deposit 'ockers &eposits and 'oans Auto loans (nsecured and revolving loans such as credit cards

!etail banks are the banks you most often see in cities on cro$ded intersections, the ones you probably use for your personal checking account. A commercial or corporate bank is a bank that $orks $ith businesses. "ommercial banks handle banking needs for large and small businesses, including Basic accounts such as current and cash credit accounts 'ending money for real and capital purchases 'etters of credit ) *uarantees +ayment and transaction processing ,oreign exchange

Commercial banks often function as retail banks as $ell, serving individuals along $ith businesses. Investment banks help organizations use investment markets. ,or example, $hen a company $ants to raise money by issuing stocks or bonds, an investment bank helps them through the process. #nvestment banks also consult on mergers and ac-uisitions, among other things.

#nvestment banks primarily $ork in the investment markets and do not take customer deposits. .o$ever, some large investment banks also serve as commercial banks or retail banks.

Central Bank
#n every country there is one bank $hich acts as the leader of the money market, supervising, controlling and regulating the activities of commercial banks and other financial institutions. #t acts as a bank of issue and is in close touch $ith the government, as banker, agent and advisor to the latter. Such a bank is kno$n as the central bank of the country. Bank of /ngland is the "entral Bank of (nited 0ingdom, !eserve Bank of #ndia 1!B#2 is the central bank of #ndia. Features of Central Bank Aims at controlling the banking system in the country #t has special po$ers to control and regulate the $orking of commercial banks of the country #t is part of the government machinery and its actions are closely coordinated $ith those of the other departments of the government, particularly $ith the &epartment of ,inance or the Treasury #t is managed by the *overnment Officials or those connected closely $ith the government.

Functions of the Central Bank


Bank of Issue The central bank of a country is the sole authority that has po$ers to print and issue money. The issue of money $as al$ays the prerogative of the government. The government delegates the right of printing currency notes to the central bank. #n fact the right and privilege of note issue $as al$ays associated $ith the origin and development of central banks $hich $ere originally called as banks of issue. Banker, Agent and Adviser to the overnment

The central banks in each country perform the functions of banker, agent and adviser to the *overnment. As a banker to the government, the central bank of the country keep the banking accounts of the government 3 both of the centre and the states, performs the same functions as a commercial bank ordinarily does for its customers. As a banker and agent to the government, the central bank makes and receives payments on behalf of the government. #t helps the government $ith short3term loans and advances to tide over temporary shortage of funds. #t also manages public debt i.e. floats services and redeems government loans. #t advises the government on all monetary and banking matters. Custodian of Cash Reserves of Commercial Banks All commercial banks keep part of their cash balances as deposits $ith the central bank of the country, either because of convention or because of legal compulsion. The cash deposits kept by all commercial banks $ith the central bank are kno$n as cash reserves. They $ithdra$ funds from these cash reserves during the busy season and pay in surplus funds into them during the slack season. +art of these cash balances are meant for che-ue clearing purposes. As all commercial banks keep deposit accounts $ith the central bank, payment by one bank to another is a simple book entry ad4ustment in the books of the central bank. Custodian of Foreign Balances of the Country The central banks in most countries maintain both gold and foreign currencies as reserves against notes

issue and to meet any adverse balance of payments $ith any other country. Besides, it is the responsibility of central banks to maintain reserves $ith #nternational 5onetary ,und 1#5,2. These reserves are referred to as normal dra$ing rights and special dra$ing rights. #t is the responsibility of the central bank of the country to maintain the rate of exchange fixed by the *overnment, manage exchange control and other restrictions imposed by the state. !ender of the !ast Resort One of the fundamental principles of the central bank is that it 1as the banker6s bank and as the supreme banking authority2 never refuses to accommodate any eligible commercial bank needing funds. At certain times of the year due to seasonal business activities or in times of intense business activities, the commercial banks may need more funds to meet the re-uirements of their customers. #n the absence of central banks, the commercial banks $ill be re-uired to carry substantial cash reserves $ith themselves to meet such emergencies. 'arge cash reserves imply restricted lending and reduced income by $ay of interest. #f a central bank exists, it is easy for commercial banks to fall back on it in case of need. By lender of the last resort, it is implied that the central bank assumes the responsibility of meeting directly or indirectly all reasonable demands for accommodation of commercial banks in times of difficulties and crises. Central Clearance, "ettlement and Transfer As the bankers6 bank, the central bank keeps the cash balances of all commercial banks. #t is easier for member3banks to ad4ust their claims against each other in the books of the central bank. Apart from economy in the use of money, much of labour and inconvenience, associated $ith the individual system of clearance and settlement is removed. This function is not restricted to a central bank alone7 it may delegate the clearing activities region $ise, to any leading bank in the region. Controller of Credit +robably the most important of all the functions performed by the central bank is that of controlling the credit operations of commercial banks. #n modern times, bank credit has become the most important source of money in the country, relegating coins and currency notes to a minor position. 5oreover, it is possible for commercial banks to expand credit and thus intensify inflationary pressure or contract credit and thus contribute to a deflationary situation. #t is thus of great importance that there should be some authority $hich $ill control the credit creation by commercial banks $hich is also kno$ as Bank credit. As a controller of credit, the central bank attempts to influence and control the volume of bank credit and stabilize business conditions in the country.

Roles #layed by Banks


!oles played by Banks are ,inancial #ntermediary "onstituent of the payment System ,inancial Service +rovider

Financial Intermediary #n the economic, every business either big or small re-uires investment of money for their business gro$th. They can not get money from society because of $% Credit Risks 3 "redit risk refers to the risk of default by the borro$er for any reason. #t is possible that

the business does not generate sufficient income to repay or the borro$er is not honest. This is the most serious risks any lender faces. &% !i'uidity Risks 8 The borro$er may have every intention to repay the loan and the business may be doing $ell too. .o$ever there could be occasions $hen the borro$er is not able to $ithdra$ funds from the business $hen the lender demands repayment. (% Interest Rate Risk 8 Another risk is due to change in the rate of interest in the market. At the time of the transactions the borro$er may have agreed to give the interest at the prevailing rate of, say, 9:. Subse-uently, interest may be reduced or increased. #ntermediation provides a business opportunity as the depositors $ill be happy to earn interest $ithout any risks and borro$ers can get loans easily. #ayment "ystems Apart from intermediary other t$o uni-ue features differentiate banks from other intermediaries like financial companies. The second part of the definition of banking points to this feature. Banks accept ;<<. deposits of money, repayable on demand <.. and $ithdra$able by che-ue<<=. Banks are the only institutions that can accept demand deposits or deposits repayable as and $hen demanded by the depositor. All other financial institutions can only take fixed deposits. Second, banks are the only institutions on $hich a depositor can issue a che-ue to $ithdra$ his deposits. Financial "ervices #n ancient times banks have played the roles as safe keepers, financial intermediary and payment system constituent. As times changed, banks have provided additional services to meet the changing needs of the people. Today banks offers more services like selling of products of mutual funds and insurance companies, collection of utility bill payments, sale of gold coins and many more. These activities also yield non3fund based income to bank.

Banking "ervices and #roducts


The services and products offered by banks can be summarized as Role Services Products Payment System !ore, 1.Cheque 2.Payorder / Bankers Cheque 3.Demand draft 4.E ectronic !unds "ransfer #.$arious Cards %De&it' Credit..( 1."ransfer 2.C earin) 3.E ectronic c earin) System 4.Cheque Co ection #.Cash *ana)ement System +.Bi Co ection 1.Purchase - Sa e of !orei)n

Payment System Consitituent

Payment and Remittance

Payment System Consitituent

Co ection

Consitituent

E,chan)e 1.Current 0ccounts 2.Sa1in)s 0ccounts 3.!i,ed De/osits 4.Recurrin) De/osits 1.Retai 2oans o 3ousin) / *ort)a)e 2oan o $ehic e 2oan o Persona 2oan o 2oan a)ainst de/osits o Credit Cards 2.Business Credits o "erm 2oan o 4orkin) ca/ita 2oan %51erdraft' Cash Credit( 3."rade !inances o Cheque Purchase' Bi Purchase' Bi Discount' 2etter of Credit %2C(' Bi 6e)otiation' 7uarantees 4.Packin)8Credit 2oans 1.*utua !unds 2..nsurance Products 3.7o1ernment Bonds 4.Stam/ Pa/er #.7o d Coins 1."a,es 2.9ti ity Bi s 1.De*at Share 0ccount 1.Safe De/osit $au t 2.Safe Custody 1..n1estment 0d1ice

.ntermediary

De/osits

.ntermediary 2oans

!inancia Ser1ices !inancia Ser1ices !inancia Ser1ices !inancia Ser1ices Co ection De*at Safe :ee/in) 0d1isory

!inancia Ser1ices

Distri&ution

#ayment "ystem Constituent


#ayment ) Remittance "ervices

Che'ues* A "he-ue is a $ritten instruction issued by a customer 1dra$er2 to his bank 1dra$ee2 to pay the specified amount to the person named 1payee2 in the che-ue. The payee can collect the amount of the che-ue in cash across the counter of the dra$ee bank or deposit the che-ue $ith his banker for collection. #f the che-ue is crossed by dra$ing t$o parallel lines on the top left corner 1;A>" +ayee=2, it is necessarily collected through a bank. +ulti City Che'ues 8 As name implies the che-ues can be collected in any of the payees branch $here the branches are interconnected > net $orked. They are also called at At +ar "he-ues6 i.e. full amount dra$n in the "he-ue $ill be paid $ithout any reduction irrespective of the location $here presented= Certified Che'ue A certified che-ue is a form of che-ue for $hich the bank verifies that sufficient funds exist in the account to cover the che-ue, and so certifies, at the time the che-ue is $ritten. Those funds are then set aside in the bank%s internal account until the che-ue is cashed or returned by the payee. Thus, a certified che-ue cannot ?bounce?, and, in this manner, its li-uidity is similar to cash. #ayorder , Bankers Che'ues The lack of certainty regarding payment of a che-ue makes it unacceptable to some entities like government departments and institutions. A payorder or bankers che-ues is a che-ue issued by a bank on itself. Both the dra$er and dra$ee is the same bank, in fact same branch of the bank. Demand Drafts* A +ayorder is generally used for making local payments as it payable at the place $here it is issued. @hen payments have to be made to far a$ay places and the payee insists on certainty of payments, &emand &rafts are used. -lectronic Funds Transfer .-FT/ Sending or remitting money to a far a$ay place through &&s involves delay, as the && has to be reached to the payee through post or courier. #t is much faster for a bank to send an electronic instruction to their branch at the payee6s center to pay him the amount. #f the payee has an account $ith the paying bank the payment can be made instantly. #nstantaneous completion of the transaction cannot happen if the payer and payee maintain their account $ith t$o different banks. #n that case the transfer or remittance is completed through the "entral Bank. Collection "ervices* Transfer @hen a person gets a che-ue from another and deposits it $ith his bank and bank has to ;collect= the amount to the che-ue and credit it to the account of the depositor. #f both the payer and payee are from same bank, collecting the che-ue is simple as the bank can debit the account of the issuer and credit the account of payee or depositor. Clearing #f the che-ue deposited by a customer is dra$n on another bank in the same city it has to be sent to the payee bank and the amount collected. Since all the banks in a city $ill be getting che-ues dra$n in other banks and it is cumbersome process and ;"learing house= is used to meet and exchange che-ues dra$n on each other.

-C" or -lectronic Clearing "ystem* To support and enable the large number of customer credits or debits /lectronic "learing system is used. C+" 0 Cash +anagement "ervices "5S is an upgraded packages of collection and payment services. 'arge companies have large numbers of dealers across the country. The dealers have to make payments on a regular basis for the goods purchased from the company. To speed up the collection process the companies ties up $ith the bank, $hich arranges to +ick up che-ues from the dealers on a daily basis *et them collected the same day through the local clearing. !emit the total amount to the bank account of the company at its head -uarters +rovide information on the number and amounts of che-ues collected and returned unpaid $ith full details of the dealers involved.

Bill Collection* Bill refers to ;Bill of /xchange= $hich is a $ritten instruction issued by the seller 1dra$er2, to the buyer 1dra$ee2, to pay a certain sum of money, to the person named in the document 1payee2. #n short, a bill of exchange is an instrument to pay. @hen a bill is payable as soon as it is presented it is called a ;&emand bill? or ?Sight bill?. @hen the dra$er is permitted some time, say AB days, to pay the bill it is called as a ;(sance= bill. Foreign -1change* !emittances like clearing7 transfer $ith in the country is relatively easy as the currency involved in are the same. @hen remittances takes place bet$een places in t$o countries, settlement becomes a little complicated because of t$o different currencies are involved. Similar to banks maintaining accounts in central bank for interbank settlement 1"learing2, bank maintains account $ith banks abroad 1Costro Accounts2 for facilitating foreign exchange transactions. All foreign remittances are routed through Costro Accounts. Intermediary "ervices Deposit "ervices Banks accepts demand deposits and fixed or time deposits. &emand deposits are repayable on demand $hile fixed deposits are repayable after the agreed upon period or maturity. Since demand deposits are more ;li-uid= 1available for use2 than fixed deposit, the interest is paid on such deposits are lo$ or no interest is paid at all. 'o$er the li-uidity higher the rate of interest. .ence the longer period deposits earn more interest. Current Accounts , Checking Accounts "urrent accounts are demand deposits that are primarily meant for facilitating settlements of transactions using che-ues. Banks do not pay interest on balances in these type of account. *enerally current accounts are maintained by business entities. "avings Accounts Savings accounts are also demand deposits offered for the benefit of individual $ho $ould like to save

their temporary surpluses and at the same time have li-uidity for payments. Savings account differ from current account in follo$ing three respects. #nterest is paid on balances in savings accounts. The central Bank prohibits banks from opening savings accounts of business entities. Some banks impose restrictions on the number of transactions from savings accounts. Banks also monitor transactions in savings accounts and if they found that it is used for business purpose, the account holder is instructed to route through current account.

Fi1ed Deposit Accounts As the name indicates, fixed deposits are accepted for fixed periods of term. They are repayable only after the period for $hich they are deposited. Banks are entitled to levy penalty on premature closure and some banks does $here others do not levy any penalty from #ndividuals. Recurring Deposit Accounts !ecurring deposits accounts are for the benefit of those $ho $ould like to save a fixed sum every month over a long period so that at the end of the maturity they have reasonable large sum. !oans Retail !oans !etail loans are given to individual for meeting one time re-uirements like buying properties such as house or car, or for meeting large one time expenses. *enerally the entire amount is given to the borro$er upfront. #n some cases like buying a flat under construction, the loan may be disbursed in installments according to the payments to be made to the builder. !epayments start after the entire loan is disbursed. Till then only interest is recovered from borro$er. 'oans are paid in periodical installments such as monthly or -uarterly. #nterest is charged by banks, every month, on the balance outstanding in the loan account. #ersonal 2verdraft Those $ith fixed income or salary income invariably run out of funds at certain times and they may not $ant to touch their savings or breaking a fixed deposit as it $ould cause loss. To manage such occasions banks offer Overdraft 1O&2 loan $hereby they can $ithdra$ from their account over and above their balance for certain limit 1O& 'imit2. The interest is charged for the amount utilized for those days. Such arrangements are usually given for one year and rene$ed every year. O& limits may be secured or unsecured. Credit cards #n "redit card, the card holder gets some time to pay for the purchases or cash $ithdra$als made. The amount up to $hich the card holder can make purchase is called ;credit limit= and it is fixed according to the credit $orthiness of the card holder. Business Credits Term !oans

,unds re-uired for ac-uiring fixed assets are given as longterm loans $hich are repaid in installments. The period of repayments and periodicity of installments are fixed on the basis of estimated profits and cash generations of the company. 3orking Capital Facilities The amount re-uired for financing current assets is called $orking capital and it $ill be ever changing. .ence the financial assistance is provided in the follo$ing forms to meets the $orking capital re-uirements of the company. 2verdraft Similar to personal overdraft, limits are given to business entities to meet the re-uirements. Cash Credit The most common and popular facility for financing $orking capital re-uirements is the cash credit. The $ithdra$ing limit is against the inventory, stocks and debtors or book debts. #ost "ale Finance or Trade Finance Overdraft, "ash credit loan facilities are given to finance $orking capital re-uirements. ,or financing the post sale re-uirements follo$ing facilities are provided. Che'ue #urchase ) Bill purchase "he-ue issued by purchaser of goods, have to send for clearing or collection and this entails delay of one to several days. Banks agree to lend the amount of the che-ue as soon as the che-ue is deposited and the advance is recovered $hen the che-ue is realized. Banks also give advance against documentary bills for collection and recover the amount $hen the dra$ee pays the amount. Financial "ervices Distribution +utual Fund 4nits #nvesting in shares is rather tricky because of volatile and no one predict the movement of share prices. #ndividuals are best advised to take the help of professionals for their investment. 5utual ,unds collets funds from investors and invest in shares and bonds. They have the expertise in 4udging the companies and in taking right decisions. Since banks have the largest reach of customer base, 5,s seeks the help of banks to sell and banks are happy to help as they get commission income. Insurance #roducts 'ife insurance companies have tied up $ith the banks to offer their life insurance and saving products 1endo$ment policies, ('#+6s, Con3'ife #nsurance etc2 to individual customers of banks. Banks also offering insurance products is called ;bankassurance= and it has been successful business model the $orld over. Collection of Ta1es and Bills Banks are no$ authorized to collect taxes like #ncome tax, sales taxes, excise tax, customs duty and

property taxes. The amounts collected are remitted to respective accounts and banks. A great convenience offered by banks is accepting payment of utility bills such as electricity, telephone etc. #n the process, banks earns commission and also get to maintain the accounts of the utility companies. "afe 5eeping "afe 5eeping 6aults ."56/ +roviding safe keeping facility of valuables is a traditional function of banks. Banks continue to offer the facility by providing to customers small safes. The safes are kept in strong rooms. Safety and confidentiality are ensured by verifying the identity of the customers before allo$ing access. Banks charge rents on annual basis. Safe "ustody is used to accept the sealed packets of valuables. The packets are kept in the banks safe. The customers $ere given a ;safe custody receipts= $hich had to be returned to the bank $hen the customer $ants to take delivery of the packet. Advisory "ervices Investment Advice The investment opportunities available today are many. ,or instance, the number of 5,s and the number of funds they offer are large. #nvestors need professional6s assistance to select the right investments options, track the performance of 5,s and to s$itch the investments at the opportune moments. Banks offers such assistance to their large customers, called private banking customers.

Banking Channels
/arlier banking services $ere provided by only one channel, namely branches. Today nearly DB: of the transactions take place in other channels like AT5, +OS as they are popular for follo$ing reasons. "ustomers have access to EF hours of the day. The cost of providing services through such channels, are much lo$er than the cost of providing such services through branches.

The non3banking channels available for customers are AT5 +OS 1point of sale2 terminal for debit and credit cards +hone Banking 1"all center2 #nternet Banking 5obile Banking 1S5S through 5obile +hones2.

#n AT5, customers can use additional facilities like che-ue book re-uest, che-ue deposit in addition to cash $ithdra$al.

Risk +anagement
Banks face a number of risks in order to conduct their business, and ho$ $ell these risks are managed and understood is a key driver behind profitability. Some of the main risks faced by banks include

Credit risk* !isk of loss arising from a borro$er $ho does not make payments as promised. +arket risk* !isk that the value of a portfolio, either an investment portfolio or a trading portfolio, $ill decrease due to the change in value of the market risk factors. 2perational risk* risk arising from execution of a company%s business functions.

Introduction to Customer Insight


The most important asset to the success of any business is its customers. Today6s banking customers are more demanding than ever. They $ant products and services that are tailored to their specific needs, delivered through the channels that are most convenient to them. #n today6s evolving marketplace, customers face a ;$orld of extremes= characterized by unprecedented complexity, intense competition and market polarization. "ustomers are increasingly demanding relevant value propositions that meet their individual needs and preferences and seek out those $ho are able to provide them. !etail banking profitability is connected to the customer insight. "ustomer #nsights $ill help and enable banks to provide superior customer service. 3hat is Customer Insight7 The terms ;%customer intelligence%, %customer insight%, %citizen insight%, %customer focus%, %customer3centric%= are often used interchangeably, $hich can be confusing. A common definition of %customer insight% relates to ?A deep Gtruth6 about the customer based on their behavior, experiences, beliefs, needs or desires, that is relevant to the task or issue= "ustomer #nsight represents a deep understanding of customer needs and the drivers of customer behavior at a level $ell beyond $hat customers are able to articulate themselves. "ustomer #nsight leads to opportunities for creating solutions that are tightly linked to the core drivers of human needs and behavior. &eveloping "ustomer #nsight includes (nderstanding the explicitly stated or ;articulated= needs of customers and potential customers, but more significantly identifying their ;unarticulated= needs. o ;Articulated Customer 8eeds= 8 Ceeds that are recognized and communicated 1stated2 by customers o ;4narticulated Customer 8eeds= 8 Ceeds unrecognized by customers that 8 $hen recognized and satisfied 8 lead to products and services that delight them

,or many banks, understanding and meeting the needs of their customers, particularly their most profitable customers, is critical to driving sustainable gro$th /very bank $ould like to have a rich $ell of descriptive and predictive insight about customers. @ith available resource, the bank could kno$, for instance, that savings account customer 5r.A 4ust bought a ne$ house and is thinking about a home e-uity line7 that credit card holder 5r. B has a college3age daughter and seeks a student loan from a local institution7 and that 5s." has had t$o unsatisfactory phone conversations regarding his investment advisors and is thinking of s$itching to an online investment site.

@ith "ustomer #nsights, bank employees $ill be $ell informed on all aspects of the customer so that they can -uickly respond to in-uiries, effectively sell more products, and -uote accurate product pricing. "ustomer #nsights $ill facilitate -uick access to detailed credit status, pricing, -uotes, orders, sales information, history information and more. Banks $ill also gain a HIB3degree vie$ of the customer6s circumstances and relations $ith the bank could better meet the customer6s needs and save or expand the relationship. The more customer kno$ledge the banks have, the easier it is to provide exceptional service

and create ne$ revenue opportunities in existing customer base. By developing uni-ue, proprietary insights about their customers, banks can create a more tailored and relevant banking experience $hich sets them apart from the competition. "ustomer insight is rapidly rising up the agenda of any organization. #n essence, customers are the lifeline of business and are to be handled $ith insight. "ustomer #nsight $ill also help the banks in strategic innovation $ith the engagement of customers in this innovation process. "ustomer #nsight is the foundation for ;"ustomer3#nspired #nnovation=. #nnovation becomes ;strategic= $hen it is an intentional process focused on creating breakthroughs in the value delivered to customers. /ngaging customers as partners in the innovation process is essential for creating breakthroughs in o Ce$ +roduct>Service and category development and o "orporate strategy development

#n practical terms, customer insight entails the use of data about customers to better understand their needs and expectations the application of this understanding in the design and delivery of services.

#nsight is not 4ust about "ollecting or purchasing data. &ata often exists already and only needs synthesizing into useful forms undertaking demographic segmentation 8 it takes a broader range of data, tools and techni-ues to generate a rich understanding of the customer a one3off activity 8 it is an ongoing 4ourney.

4nderstanding customers *etting customer insight only via statistics may not be the $ay to go because these track the middle of the picture and not the before and after part of the picture. The G$hat happens after3the3sale > service part6 may be the biggest of challenges in learning about the insights to customers6 thinking. This is $here customer insight becomes so very important but is not often tracked. The only $ay this can be tracked is for those selling the product>service need to get the feedback from their customer1s2>client1s2. /ffective use of insight can help to Accelerate an enterprise3$ide vie$ of customers (nderstand and respond to customer3specific needs Speed up customer on3boarding and drive greater retention /nable dynamic sales, customer service, marketing, and compliance processes &eploy front office applications in a multi3channel environment. deliver efficient and effective tailored services target resources according to priorities develop responsive services that encourage and reflect customer engagement enhance customer service and improve satisfaction #nform strategic3level planning and decision making, community engagement and improvement. &evelop appropriate products and service propositions by segmenting and analyzing customer value.

!espond to customer needs by providing the best resources and responses to representatives. &evelop scorecards $ith appropriate ob4ectives and measurements. 'everage data collected in risk and compliance processes to achieve competitive advantage and !eturn on #nvestments 1!O#2. Build virtual real3time and historic single customer and business vie$s to empo$er enterprise integration.

.o$ever, big obstacles stand in the $ay of this idea. #n most banks, customer information is scattered across unrelated and different databases o$ned by different lines of business. Often banks as the result of mergers and ac-uisitions over the yearsJhave multiple #T systems and data repositories that duplicate cross3enterprise functions and store customer data in multiple places. This can result in an inconsistent experience for a customer $ho deals $ith the bank using different channels. The inability of the bank to develop a comprehensive vie$ of their customers also limits their ability to cross3sell and up3sell based on customer needs. The insights hidden in those databases should be revealed, shared and published across the institution, but at the same time, data must be kept strictly private and protected. !esolving these challenges re-uires #T investment at a time $hen bank #T budgets remain flat overall. Amid these realities, ho$ to get customer data under controlK .o$ to transform it from information into insightK @hat do financial institutions gain from customer analytics, and ho$ should it be implementedK

This can be achieved through the implementation of customer analytics in Banking.

Customer Analytics and Benefits


$% React 'uickly to changes in customer behavior% ;As customers bank online, through AT5s or through mobile payments, they are sending subtle signals about their preferences and frustrations $ith their banking relationships. (nless the customer activities are closely monitored, banks often don6t kno$ $hat customers $ant or are unhappy $ith until it6s too late. So some banks use analytics soft$are to $atch to immediately spot changes in customer behavior, generate alerts, detect service problems and use that kno$ledge to make a sale or save a relationship. &% Reduce customer and counterparty risk% Analytics can help banks monitor the credit$orthiness of borro$ers and the reliability of counterparties. #ntegrated customer databases $ill set the foundation for customer analytics, to assess at a glance bank6s exposures to ailing counterparties and troubled clients. #t $ill also be able to create HIB3degree vie$s of clients, for instance, gaining consolidated vie$s of a customer6s accounts in multiple cities around the $orld, to decide $hether or not to extend more credit to that customer. (% Reduce operational risk% ;Basel ## rules are making banks look more closely at their operational risk. An unified data $arehouse $ith an overlay of analytics $ill reduce the operational risk associated $ith inconsistent reporting. By eliminating redundant systems and by improving the data -uality, the traceability can be improved. The time spent each day on manual data management tasks $ill get reduced from several hours to less than HB minutes, enabling employees to focus on more important tasks. 9% Fine:tune marketing campaigns%

Analytics has long been used in retail environments to improve marketing campaigns. Banks $ere not the first to adopt analytics for marketing, but $ithin banks, marketing departments have been among the first to recognize the value. Banks brought in customer analytics to test its assumptions and to create product propensity models. ,or instance, the bank6s marketers might have an assumption that FL percent of customers $ho open checking accounts also open savings accounts. The marketing team inputs the numbers around each campaign, analyzes the results and ad4usts its models accordingly. 5ore recently, the bank has been using its customer analytics platform for predictive analysis, for instance, to forecast revenue and make sure a campaign has acceptable return on investment before it is launched. ;% #redict the right communications channel to use for each customer% #deally, banks $ould like to determine the best combination of price and response rate for different customers and segments, by product. A predictive model helps determine $hich channels are important to each customer, according to customer preference, $hile factoring in the cost of that contact channel to the bank. #f a model predicts that a customer $ill bring in MNBB $orth of profit, and there6s a IB percent chance that person $ill respond to a phone call, then it might make sense to add that person to a telemarketing campaign, even though a phone call costs t$o dollars versus t$o cents for an e3mail. <% -fficiently provide branches =ith lists of solid sales prospects% Banks analyze a combination of household data and product o$nership data every month, and then supply each of its branches $ith a list of customers most likely to sho$ interest in additional bank products. ,or example, customers $ho have a direct deposit account and credit card through the bank might be good candidates for a debit card promotion. "ustomers $ith a checking account and mortgage are good prospects for a home e-uity line of credit. >% +anage debt collection% "ustomer #nsight > analytics help the debt management and collection. "ustomers $ho have fallen behind in their payments and those $ho might be having financial difficulties can be flagged. Banks also use analytics to segment the customer portfolio into customer types so it can assign the right type of collections effort to each case. ?% Detect credit card and online banking fraud% Banks have long used customer insight and analytics to detect card fraud, looking for unusual behavior that might indicate online banking fraud. ,or instance, if a customer suddenly logs in from a different address, that could indicate foul play. #f they6ve never used online bill pay before, and they suddenly use it, or if the fre-uency of their payments goes up dramatically, those could also be red flags. @% #rovide better research and reports to salespeople% Banks use customer insight > analytics systems to improve the sales. Banks apply analytics to reveal ne$ insights about sales opportunities $ith its financial institution and enterprise customers. Armed $ith this analytically derived information, sales people can give more timely, targeted and relevant presentations to customers. Developing customer insight "ustomer insight is an ongoing process that evolves $ith changes to customer and customer needs. #t should be built into everyday mechanisms for performance management, decision making and engagement. #eople and skills #n practice, customer insight is often developed by an internal team 8 recognized experts $ith kno$ledge of the tools and techni-ues, access to data, and the ability to bring the t$o together.

Insight tools, data and techni'ues "ustomer insight is as much about organizational culture and $orking practices as it is about specific data sets and ne$ tools. .o$ever, there are a number of tools and techni-ues available to support customer analysis. Analytical techni-ues for understanding customers o "ustomer Segmentation o "ustomer 4ourney mapping o 5arket research methods for understanding customers o 5arket research tools o #nternal sources and repositories of data and o /xternal sources and data repositories

The follo$ing techni-ues can help, pull together and present customer insight to sho$ $ho the customers are, as $ell as their experiences and preferences. Customer segmentation Segmentation divides a target audience into groups by common characteristics and needs. Once groups have been differentiated, councils can target and tailor resources appropriately. Segmentation information is often combined $ith geographic information system 1*#S2 mapping to sho$ $here different customer groups live. Customer Aourney mapping A customer 4ourney map is a $ay to describe a customer%s experiences through a life event, intervention or interaction $ith one or several services, and the emotional responses these provoke. "ustomer 4ourney mapping can then be used to design service improvements that reflect the customer6s experience. +arket research methods for understanding customers (sing specific market research methods can help to generate information about customers, ho$ they experience services currently, and ho$ they $ould prefer to receive them in the future. +arket research tools Consultation "onsultation, or directly asking the prospective customers $hat they need, is a basic source of insight, and is often legally re-uired. Ceighborhood charters and other local forums for agreeing priorities and delivery targets can serve as a $ay of understanding local preferences that goes beyond formal consultation. As $ith most tools, consultation is limited as it only reaches a small sample of the population. #t needs to be combined $ith other sources of information to bring about true customer insight. Connecting =ith communities* communications toolkit Focus groups ,ocus groups or panels are a more -ualitative form of consultation that brings together a small number of service users to examine a particular issue or understand detailed preferences. This can provide a rich source of information and examples to support data analysis. "urveys Surveys are a form of consultation and are a useful $ay of understanding user6s vie$s in a -uantitative

$ay. Survey data can be an especially useful input into segmentation exercises 8 for example, to understand the relative satisfaction of different groups. "ocial media "ouncils are increasingly using tools such as blogs or discussion forums and social net$orking sites like ,acebook to supplement other forms of consultation and to engage $ith people $ho prefer to communicate online. 4sability testing and =ebsite analysis Assessing systems and $ebsites from the customer%s perspective can help identify $here the banks are letting the customer do$n, even if they fulfill technical re-uirements. @ebsite visitor statistics also provide a source of data about service use and channel preference that can be fed into insight analysis. Internal sources and repositories of data The challenge in the large amounts of data $hich are already available is to use this data to inform decisions. !ocal information systems .!I"/ An '#S brings together data from various sources to form a repository of local information for use in policy and decision3making. Frontline and customer service staff Staff are a key source of information on the preferences and concerns of customers. .olding intervie$s and $orkshops $ith staff helps to capture their vie$s and experiences. Customer relationship management .CR+/ systems "!5s are an increasingly common source of information about customers and their contact $ith councils. The more services covered by the "!5 system, the more po$erful the data source can be. The challenge, ho$ever, is to avoid duplication of customer details. "ervice area data #ndividual service areas hold information and data about customers. This can include transaction records, $hich can be combined $ith other sources of data to gain a deeper understanding of service users. Banks team need not necessarily gain a lot of ne$ skills, but they $ill need people to Analyze and manipulate data +resent and use data to inform strategy and policy (nderstand and use market research techni-ues and methods "ommunicate the results of customer insight analysis in a $ay that makes an impact on the organization.

/stablished processes are vital to collecting, analyzing and disseminating information. Business processes that should be informed by customer insight include service planning business cases

/ngagement and empo$erment. &ata and systems

*ood data is the foundation of customer insight analysis. #nformation collected about customer > prospective customers must be stored and shared $ithin and bet$een organizations. &ata sets 8 particularly those purchased externally 8 need to be held in one place and made available to the $hole organization. (nderstanding an individual customer%s interactions 8 a %single customer vie$% 8 is critical to setting up a single %clean% data source on a customer. This can then be used to develop reliable customer analysis. Standard $ay to approach a customer insight pro4ect #dentify the ob4ectives for using insight and the related -uestion or issue. @ork out ho$ better understanding your customers $ill help you. (ndertake an audit to establish $hat people, processes and data you already have, the data you need and $here to get it. This includes identifying the tools you $ill use. &evelop a model for customer insight in your organization and a plan for achieving it. (ndertake a pilot to help build skills and stimulate demand for customer insight throughout your council.

Customer insight and data protection Because customer insight often involves sharing and manipulating large amounts of personal data, it is sub4ect to data protection la$s. &ata protection la$s do apply, $here data is being shared bet$een organizations. Sharing of personal information should be supported by a sound business case and preferably accompanied by a privacy impact assessment. This should identify the intended benefits of collecting the data and sho$ that the council has identified and addressed any risks to data protection. ,or most customer insight purposes, as banks re-uire information about trends $ithin the customer > prospective customer community 8 personal data can be anonymised keeping the aggregate level data. &ata should therefore be shared in a $ay that minimizes or avoids the use of personal identifiers. All customer insight pro4ects should start $ith a clear sense of ho$ the kno$ledge $ill be used to make decisions. ,ollo$ing is a list of some of the principal applications in customer insight pro4ects . #nform strategy and policy #nformation on customers > prospective customer can be used to inform decisions and to input into policy or scrutiny revie$s. 5anage performance (nderstanding customers% needs and experiences can help to understand $here services are performing $ell or badly. 5arket services more effectively (nderstanding different groups of customers makes it possible to market services more effectively, including being able to encourage take3up of services or different channels to particular groups. "hange behaviours Social marketing techni-ues that employ a deep understanding of the customer to provide information, products and services can be used to change people%s behaviour. #mprove service design 0no$ing $hat customers $ant and need from a service can help identify areas of $eakness and feed into the design of that service.

#ntegrating customer information can fuel bank%s gro$th. By creating a single customer vie$, bank can enhance analysis and planning, and improve the development and deployment of multi3channel cross3sell and retention propositions. And measure the effectiveness of marketing, sales and service strategies.

"ustomer insight solutions can be based on soft$are, hard$are and services combined $ith best3of3breed applications and tools from alliance partners. Any customer insight solutions should provide complementary analytics to empo$er multi3channel banking and successful staged core systems transformation, integrating closely $ith risk and compliance to share corporate data. Challenges in gaining customer insight* The challenge $ith gaining customer insight is t$o3fold N. .o$ can you kno$ that $hat the customer says is trueK E. .o$ can you kno$ $hat the customer does $ith your product>serviceK The first -uestion can be partially resolved by using a variety of -ualitative and -uantitative techni-ues 1focus groups, perceived customer value surveys2, and then seeing ho$ the responses>results ?converge?. This is not a simple process, but it%s critical 3 especially $hen you%re using that data to innovate, and not 4ust to improve an existing process or product. The second -uestion is partially ans$ered by transaction data, but additional $ork, such as ethnographic study, can be absolutely critical in finding out ho$ your service or product is actually used. And, given that your ?service? is really your entire, lust3to3dust relationship $ith a person, you really have to understand ho$ you engage someone, ho$ that engagement compares $ith other sources of engagement, and then on$ard from there 1exploration, selection, use, retirement of the product>service>relationship2. (ltimately all of this data should be in service of the -uestion @hat is the larger goal of the customerK #t could be to solve a problem, to get closer to an aspiration, to serve the ego. +eople don%t buy a drill for the ability to drive a drill bit. They buy a drill to make a hole. They $ant a hole, not a drill. This is in part $hy this -uest for insight is especially tricky $hen $e try to innovate. @hy does a customer $ant a holeK To put a scre$ in. @hyK ,or many customers To hang something. So, if $e $ant to innovate, $hat $e really $ant to do is to come up $ith something that helps people hang something. @e might be able to circumvent having to continually improve your drill. +ragmatically, the follo$ing can be tried N. ,ocus groups to determine the benefits sought by the customers. E. &etermine the aspects of this benefit H. &o a survey. F. (sing factor analysis or similar techni-ue, determine $hich aspects are most important, and $hich are truly independent of each other. L. &o a bigger survey, using a reduced and sufficiently independent set of value drivers. I. Survey Con3"ustomer, or customers of competitors. D. (se factor analysis again and determine ho$ the customers ?clump? in their needs. #f you $ant to take it further, you can also ask respondents to score ho$ $ell you, and your key competitors, provide value along these value drivers. That can give you a score relative to both the value drivers as $ell as to your competitors. !eal insight can only happen through dialogue, and surveys aren%t enough. #magine approaching your spouse>significant other and saying, ?&ear, #%d like to really understand

you more than # do, and to get feedback about $hat # might do to improve our relationship. @ould you mind filling out this surveyK?. &eep customer insight is usually complex and re-uires a multi3faceted approach, integrating feedback 1of various types2, transactional data and a dash of intuition. Conclusion Banks can no longer think of their customers in traditional, demographic3based segments and successfully deliver a differentiated experience. "ustomers $alk in to the Bank $ith a specific mission, driven by fundamental, personal values and attitudes. "ustomers $ho share the same surface characteristics may $ell have meaningfully different needs and preferences. &eveloping deeper insights through more sophisticated approaches to segmentation and innovative analytical models is a key step to$ard creating a more customer3centric banking experience. Banks need to kno$ ho$ their customers make decisions, $hy they bank there, and $hat their needs and preferences. Armed $ith these insights, banks can develop services strategies that are better aligned to their target customers. *oing for$ard, the more tailored and personalized the experience that banks create for their customers, the greater the differentiation from their competitors and ultimately, the greater the success.

2bAective
The ob4ective of this module is to give the reader an overvie$ of the basic accounting concepts and terms applicable to bank accounting, the various financial records maintained by a bank and the financial statements prepared by a bank. Financial Accounting* 3hat is accounting7 ,inancial accounting involves (nderstanding the standard accounting principles Applying the accounting principles $hile recording all transactions "lassifying the recorded data under appropriate heads or accounts Summarizing accounts into various account statements

The follo$ing diagram displays the role accounting plays as an information system that aids business and economic decisions made by user3decision makers.

3hat is the purpose of accounting7 ,inancial accounting information .elps the o$ners, managers and external users such as investors, stock exchanges, government authorities such as income tax officials to understand the financial performance and position of any organization. .elps to understand the follo$ing aspects of any entity o @hether the entity has made a profit or incurred loss during the accounting period o @hether the profitability of the entity is ade-uate in terms of return on capital o The values of entity6s assets, liabilities

Concepts of Accounting "ash Basis Accrual Basis

Cash Basis* /ntity records a transaction of income $hen realized or an expense $hen incurred. /x. !ent paid 8 The transaction is recorded $hen the rent is actually paid. #f the rent for the month of 5arch is paid in NBth of April, and a financial statement is prepared in HNst 5arch, the rent paid for the month of 5arch $ill not be reflected in the statement prepared as on 5arch. Accrual Basis* All the income and expenditure that has become due and is receivable or payable 1in due course2 is recorded. Accrual based accounting is also kno$n as mercantile system. ,or example, the rent for the month of 5arch although paid in April, $ill be recorded as Grent payable6 in the books of account in the month of 5arch. Similarly, all the incomes that have become due and receivable $ill be recorded in the books of account even if it is not recorded.

Book:5eeping #rocess #t is important to dra$ a distinction bet$een book keeping and accounting. @hile book keeping is the simple recording of business transactions, accounting is the use of the information recorded to produce reports for management, share holders and others. Book30eeping is a part of accounting and is concerned merely $ith the recording and keeping records of business transactions accurately and systematically in accordance $ith certain $ell3accepted principles and rules. All business transactions over a specified period of time are recorded and summarized as part of book3 keeping. Such a specified period of time is called the accounting period. This period may be month, a half3 year, a full year or any length of time. To find the profit or loss for an accounting period, only those transactions that fall $ithin that period is taken into account. Double -ntry "ystem for Accounting As per this system, every transaction affects t$o or more accounts and is recorded in t$o or more accounts. One account receives the benefit of the transaction $hile the other gives the benefit. The t$o aspects are called debit and credit. &ebit and credit transactions are posted to an account and the account balance is arrived at. Account balance refers to the amount of money appearing against an account head. Debit An accounting entry, $hich results in either an increase in assets and expenses or a decrease in liabilities>net$orth. #t is represented by the abbreviation ;&r.=. ,or example, Bank charges debited to a customer6s account. ,or posting the transaction, bank charges debited to a customer6s account, the customer6s account $ill be debited $hile charges collected account $ill be credited. Credit An accounting entry $hich results in either an increase in liabilities and income or a decrease in assets or expenses. #t is represented by the abbreviation ;"r.= ,or example, interest credited to a customer6s account. #nterest credited to customer6s account, the customer6s account $ill be credited $ith the interest amount $hile interest account $ill be debited.

Types of Accounts Accounts can also be classified as personal accounts, real accounts and nominal accounts.

#ersonal Accounts* are accounts of parties $ith $hom business is carried on. These may be accounts of Catural persons e.g. 5r. O6s Account Artificial>'egal /ntities e.g. AB" ) "o Accounting of #ersonal Accounts* &ebit the !eceiver "redit the *iver !eal Accounts are accounts of assets>properties in>$ith $hich business is carried on. /.g. Building Account Accounting of Real Accounts* &ebit $hat comes into the business "redit $hat goes out of the business 8ominal Accounts* are accounts of expenses>losses a business incurs and income>gains a business earns.

/.g. !ent +aid Account Accounting of 8ominal Accounts* &ebit all expenses and losses "redit all incomes and gains Assets ) !iabilities Assets Assets refer to the properties o$ned by a bank and debts due to it from other parties that can be converted into cash. #t can be further classified as Current assets* refer to temporarily held assets meant for conversion into cash $ithin a short period of time. #ncludes "ash, #nvestments and Accounts !eceivable. Fi1ed Assets* refer to assets $hich are of permanent nature and are held for use in the business and not for sale. #ncludes land and buildings, furniture and fixtures and plant and machinery. Intangible Assets* refer to assets that lack physical existence. #ncludes good$ill, copyrights and patents.

!iabilities 'iabilities refer to amounts o$ed by a bank to other parties either for deposit of money in the bank, the purchase of goods on credit or for the purchase of assets on credit, loans borro$ed, services received on credit and shareholder money. 'iabilities can be further classified as

Current liabilities* refer to liabilities re-uired to be repaid $ithin a short period of time, usually one year. #ncludes &eposits taken from the public, other banks and institutions, borro$ings in #ndia and outside from other Banks. !ong term !iabilities* refer to those liabilities that are repayable for a period beyond one year. #t includes Share "apital, !eserves ) Surplus. #n essence, all monies deposited in a bank are liabilities from the bank6s point of vie$, $hile all forms of lending>investment by the bank are its assets.

Income ) -1penditure Income !efers to income earned by a business by $ay of sale of its products and services. -1pense /xpense, as the name suggests, refers to expenditure incurred by a business. "uspense Accounts* Suspense Accounts are used to store short3term funds>securities until a permanent decision is made about their allocation. Or route entries $hen accounting entries for certain transactions cannot be determined or $hen a mismatch of accounting entries in an account occurs. The balance in the suspense account is subse-uently scrutinized and suitable rectification entries are passed. Contingent Accounts* These are accounts that are maintained in order to monitor and keep a record of contingent or conditional future liabilities. These transactions have no direct effect on a bank6s position. Such accounts are not taken into account at the time of preparation of the Trial Balance, +rofit and 'oss !eport and the Balance Sheet. ,or example, 'etters of "redit opened, *uarantees issued, etc. Trial Balance

#n double entry accounting system, for every transaction, the amount involved is entered on the debit side of one account and the same amount is entered on the credit side of another account. /very debit is matched by an e-uivalent credit. Therefore, $hen the debit and credit balances in various accounts are listed and totaled, the totals $ill tally. Trial balance is a list of closing balances in all accounts $ith the debit and credit balances $ritten separately. The total of debit balances must tally $ith the total of the credit balance. @hen the balances do not tally, it indicates there is something error or mismatch in posting and or in calculating the balances in the account or in totaling the t$o sides of the Trial balance. 5ain purpose of trial balance is to check the arithmetical accuracy. #t can be prepared based on follo$ing principle.3 &ebit All expenses, losses and assets "redit All #ncomes, gains and liabilities The Chart of Account This is a list of all accounts based on their codes $hich ensures that the accounts are grouped as per their type, classification, cost>profit centre3$ise and currency3$ise defined as in the accounting system. The hierarchy of grouping of ledger accounts in the "hart of Accounts is highlighted by the follo$ing example $herein the ;Balance $ith Banks= is arrived at by grouping ;Balance $ith Banks in #ndia= and ;Balance $ith Banks outside #ndia=. /ach of these balances are arrived at by grouping ;Balance held in "urrent Accounts= and ;Balance held in &eposit Accounts=

Inter Branch Accounting All accounting entries pertaining to transactions $hich are affected bet$een t$o branches of the same bank are routed through the #nter Branch account. Such transactions could be in the nature of che-ues sent for collection, telegraphic transfers, transfer of expenses, transfer of customer accounts and so on. lnter3branch entries may be routed through the .ead Office>the !egional Office>directly bet$een branches. Inter Bank Accounting All banks maintain accounts $ith the "entral Bank, through $hich all inter bank transactions, are routed. Such transactions are mainly of the follo$ing nature "learing Transactions &ra$ing and "ollection Arrangements "all 5oney and other Treasury related activities +ayment System Activities 8 !T*S > C/,T

Reporting Types of Reports

Regulatory Reports* refer to those reports $hich a bank is re-uired to prepare in order to fulfill the re-uirements of the "entral Bank $hich is the regulatory authority for all banks. /xamples Statement of key banking indicators. There are also other regulatory bodies like Securities ) /xchange Board of #ndia 1S/B#2, *overnment &epartments like #ncome Tax &epartment, "ustoms ) "entral /xcise &epartment, etc.. Any reports generated and submitted to them also comes under the !egulatory !eports category. +I" Reports* refer to reports prepared by a bank for internal management purposes. The nature and type of these reports $ould vary from bank to bank depending on the individual re-uirements of each bank6s management. Examples: &eposits3#nterest Accruals > +ayment !eport, &eposits +aid !eport, 5atured &eposits &ue !eport, (nclaimed &eposit !eport, Account 'isting Examples: 'oans3 'imits Sanctioned !eport, "ollaterals !eport, "redit !ating !eport, Overdrafts !eport, *roup3$ise /xposure !eport Control Reports* refer to reports prepared by a bank for internal control purposes. Such reports enable the management in its decision making. /g., 5onthly Tally !eport of different *' balances $ith the respective account balance totals. eneration of Reports !eports are mostly generated for the follo$ing areas eneral !edger This is a book of account and is a collection of the control accounts of all the subsidiary ledgers, accounts of all assets held by the business, all liabilities of a business, all expenses incurred and all incomes earned by a business and other accounts like suspense accounts, contra accounts and so on. *eneral 'edger System, as the name suggests, refers to the system by $hich a business 1in this case a bank2 records and consolidates its day3to3day financial transactions relating to the ac-uisition of funds and their allocation. #t provides the business $ith a conceptual and analytical frame$ork for financial decision making by !ecording details of transactions pertaining to all assets, liabilities, income and expenditure items "ubsidiary !edgers Separate ledgers are maintained by a bank for different types of accounts. These ledgers contain account3 $ise details of day3to3day transaction postings. They are so called because they are subsidiary to the main ledger that is the *eneral 'edger, in $hich control accounts 1totals of each subsidiary ledger2 of these ledgers are maintained. The totals of these ledgers are tallied $ith their respective "ontrol Accounts appearing in the *eneral 'edger on a daily basis.

#rofit and !oss "tatement The profit or loss is ascertained by listing the balances in all the nominal accounts, the expenses on the debit side and income on the credit side, and finding out the net balance. The consolidated listing of all nominal accounts is called the +rofit and 'oss account. Since profit earned or loss incurred over a period is ascertained, the title of + ) ' a>c is $ritten as +rofit and 'oss Account for the +eriod /nded PPPP1date2PPPPP. #f the credit side 1income2 total is more, the business $ould have made a profit and if the debit side is more it $ill indicate a loss. The balance in the nominal account is transferred to the + ) ' account, $hich is also a nominal account at the end of the year. i.e. on financial year closure. Balance "heet Report @hen the + ) ' a>c is prepared, all the nominal account $ould have been closed and only the real and personal accounts $ill be left. Balance in the real accounts represents Assets of the business such as cash, furniture, computer and building. Balance in the personal accounts represent amounts o$ed to the business by debtors 1assets2 and amount o$ed by the business to its creditors 1liabilities2. Therefore, the balance in the real and personal account represents the assets and liabilities of the business. The debit balance represent the assets and the credit balance the liabilities. These balances feature in the balance sheet. The liabilities appear on the left and assets on the right. The parameters that need to be defined are

'evel of !eporting Branch 'evel>Codal 'evel>Bank 1as a $hole2 level +eriod of !eporting 5ulti3currency classification

3ho is a Customer 7
'ike #ndividual persons, government organizations like rail$ays, private limited companies, partnership firms, companies, and trust associations clubs can o$n assets and have legal rights and obligations. All such entities are recognized by la$ can also maintain various types of accounts $ith banks and all are customers of the bank. 'egally recognized entities have almost same rights as individuals and can do many of the things that individuals can do including running business for $hich they can borro$ money too. Since legal entities are fictitious persons and do not have physical presence, they have to exercise their rights and discharge their obligations through the individuals $ho run them.

8eed for a Customer 7


The bank6s approach to a customer is changing drastically day by day and banks have started seeing customers $ith more focus on relationship they establish and maintain $ith the customer than seeing a customer $ho has a deposit or a loan account $ith the bank. @ith this change in scenario, banks have started giving high importance to the various types of information they gather and maintain about a customer during the lifecycle of an account. Banks use the personal information they gather more to give a personal touch to the relationship $ith the customer like by sending birthday $ishes, etc. Customer of a Bank and not a Branch Also in earlier days customers $ere merely seen from the branch perspective, $here the customer had an account and operated. But the present scenario is to look at a customer from the Bank6s perspective. @ith this perspective in mind, banks have started designing banking solutions for the customers like AT56s, #Q!6s, Any$here Banking facilities etc. These facilities provide the customer the convenience of banking

not only from their home locations but from any other locations $here the banks have presence. @ith this idea in mind the banks have started moving from a decentralised data environment to a centralised data environment. The centralised data environment makes maintenance of customer related information easier, since the information is stored at the bank level and not at the branch level7 this also results in uniformity of data for a customer across the bank.

Types of Customers
There are E broad types of customers $e come across in banking namely, +ersonal 1#ndividual2 ) "orporate. #ersonal Customers are Any individual $ho opens an account $ith a bank>institution Operates the accounts for personal use #nformation collected during account opening $ill contain personal data of the customer +ersonal customers may be eligible for only certain types of accounts>services of the bank

Corporate Customers are Any group of individuals like partnership firms, limited companies etc., $ho opens an account $ith a bank>institution Operates the account for business purpose #nformation collected during account opening $ill contain business data of the customer "orporate customers may be eligible for most of the non3personal types of accounts>services of the bank.

Individuals #ndividuals can open bank accounts singly or 4ointly $ith one or more other individuals. #n a single account only account holder can operate the account like /n-uiring about his>her accounts 1balances, che-ue status2 &epositing cash > "he-ues @ithdra$ing cash or issuing che-ue for payment to others Transferring money from his account to another "he-ue book re-uest, AT5 card or phone banking facility Asking for T&S 1Tax &educted at Source2 certificate Account modification like including another name of person in the account and make it as Roint account

+andate Bolder , #o=er of Attorney A customer may authorize another person to operate the account by issuing a letter of authority. Such as letter of authority is called a ;5andate=. The mandate holder has all the po$ers that a customer has. Bank has to take signature and photograph of the mandate holder along $ith the mandate.

The account holder may also issue a po$er of attorney that has the same effect as mandate. A po$er of attorney is a registered document by $hich a person grants certain po$ers to another person. The account holder can invoke mandate and po$er of attorney at any time by issuing a letter to the bank. 8omination According to la$, a nominee is a trustee not the o$ner of the assets. #n other $ords, he is only a caretaker of the assets. The nominee $ill only hold money>asset as a trustee and $ill be legally bound to transfer it to the legal heirs. ,or most investments, a legal heir is entitled to the deceased6s assets. ,or instance, Section HA of the #nsurance Act says the appointed nominee $ill be paid, though he may not be the legal heir. The nominee, in turn, is supposed to hold the proceeds in trust and the legal heir can claim the money. Coint Accounts T$o or more individuals can maintain 4oint accounts $ith the banks. At the time of opening the account the bank has to obtain clear instructions from them on ho$ the account $ill be operated. The common operational instructions are Both Cointly 8 The account can be operated by both the account holders together only. Cointly or "urvivor 8 @hile the account can be operated by both the account holders together only, on the death of any one of them, the balance becomes payable to the survivor. -ither or "urvivor 8 Any one of the customer can operate the account. #n case of death of a 4oint holder, the balance becomes payable to the survivor. +inor* 3 A minor is a person $ho has not competed N9 years of age. As per la$, a minor can not be held responsible for not keeping his $ords. #n the circumstance, lending money to minor is a dangerous proposition. @hile banks do not lend to a minor, they do open deposit accounts of minors to be operated by their guardians $ho are expected to protect the interest of the minors. #roprietorship Concerns A business o$ned by one individual is kno$n as +roprietorship "oncerns. Since only one individual is involved he is entirely responsible for any debt of the business. This is similar to the individual account except the legal status of the account. #n this case the account is opened by the company name and proprietor operates the account on behalf of the business. #artnership Firms The partnership act defines partnership as ;the relation bet$een persons $ho have agreed to share the profit of a business carried on by all or any of them on behalf of all=. The understanding bet$een the partners are documented and recorded in a registered document called ;+artnership deed=. Operations of a partnership account can be done by one or more partner as per the operating instruction given by them at the time of opening the account. Coint "tock Companies 'ike a firm, a company o$ned by a group of persons, but unlike a firm, a company has a legal existence separate from that of the o$ners. The properties of the company and not 4ointly by the o$ners, $ho are called as shareholders, as the capital of a company is divided in to units of e-ual amount called shares. (nlike partners, share holders are not personally liable for the debts of the company. The company is

managed by &irectors $ho are elected by the share holders. The &irectors, collectively constitute the Board of &irectors, $ho appoint the 5anaging &irector $ho is responsible for the company in accordance $ith the policies approved by the board. The 4oint stock companies are the legal entities registered $ith the !egistrar of "ompanies. These companies are governed by The "ompanies Act. T$o ma4or types of companies are +rivate 'imited "ompany +ublic 'imited "ompany

,ollo$ing documents are re-uired for bank to open the accounts Account opening forms signed by officials $ho $ill operate the account 'atest list of &irectors "ertified copy of resolution of the Board authorizing for account opening and authorizing the officials to operate the account "ertified copy of "ertificate of #ncorporation "ertified copy of 5emorandum of Association "ertified copy of Articles of Association "ertified copy of the certificate of commencement of Business, in the case of public limited companies.

Trusts Trusts are created by persons kno$n as ;authors= of the trust to carry on some activities for the benefit of a person or a group of persons kno$n as ;beneficiaries=. ;Trustees= are appointed by the author of the trust for carrying out the activities of the trust for the benefit of the beneficiaries. A Trust &eed is a document that specifies the ob4ectives the trust, the names of the beneficiaries of the trust, the activities that can be carried on by the trust The bank has to allo$ operations strictly in accordance $ith the provision of the trust deed and should not allo$ the Trustees to misappropriate the funds of the trust. "ociety and Associations Bank accounts can be opened only for the registered societies and associations. "ooperative societies have to be registered $ith the registrar of "ooperative societies. The account is operated by any authorized signatory. The bank has to collect the Bye 'a$ of the society > association for opening the account and should allo$ the operations in the account strictly as per the Bye 'a$. The Bye 'a$ specifies the ob4ectives and rules for operation of the Society > Association Clubs "lubs may be run a business or as a non3for3profit entity. #t could be registered as company or society or trust. The procedure to be follo$ed for opening the account of a club and allo$ing operations $ill depend upon its constitution. overnment departments and +unicipal Bodies *overnment departments > bodies > agencies can open savings accounts and current accounts provided They do not receive any funds from government budget for their functioning.

They submit declaration that they do not receive any budget allocation.

Bank 0 Customer Relationship The legal relationship bet$een a banker and a customer varies $ith the nature of the services rendered by the bank. The various relationships can be summarized as Service 2oans De/osits P ed)e of Security Co ection Remittance Distri&ution Relationship-Bank Creditor De&tor P ed)ee 0)ent !iduciary 0)ent 0)ent of *!s' Bond issuer etc 0d1isor Relationship-Customer De&tor Creditor P ed)or Princi/a Princi/a Customer of *!s' Bond issuer etc 2essee Rece/ient

Safe De/osit 2ocker 2essor 0d1isory

3hat is a Deposit7
A &eposit can be defined as a Sum of money received from a customer by a bank for a specified period of time, on a specific rate of interest, repayable on maturity or on demand by $ay of cash che-ue, draft or any other legal means as desired by the customer Types of Deposits &eposits are classified into E categories namely &emand &eposits and Time &eposits.

Concepts in Deposits "haracteristics of a &eposit A typical deposit $ill have the follo$ing characteristics "an be opened by a +ersonal or "orporate "ustomer @ill be for a specified period of time say NL days to L years @ill earn interest at the agreed rate @ill mature at the end of the agreed period @ill be repaid to the depositor only or his authorized representatives or heirs or nominees A &eposit represents a liability for the bank.

Demand Deposits &emand &eposits are repayable on demand by the customer1s2. *enerally demand deposits are $ithdra$n by the depositor by issuing a che-ue, $hich is an ;instruction to the bank to pay the stated amount to the person named in the che-ue=. The follo$ing are a fe$ types of demand deposits. Current Account* "urrent accounts are primarily meant for business people $hich may be Sole +roprietorship concerns, +artnership firms, Roint stock companies, Trusts, Associations and individuals $ith large number of transactions. #t facilitates the transactions using che-ues. *enerally banks do not pay interest on balances in the current account but there are fe$ countries $here the banks do pay interest for current accounts also. As no interest is paid in current accounts, there is no restriction for number of transactions in the current account. 5inimum balance re-uired to be maintained in current accounts are higher than savings account due to higher transaction cost. "avings Account* Savings accounts are demand deposit accounts offered for the benefit of individuals or group of individuals. Savings account differs from current accounts in three aspects N. #nterest is paid on balances in

savings account E. Business entities cannot open savings account H. Some banks impose restrictions on the number of transactions that can be put through savings accounts on a monthly basis. #n the vie$ of the absolute li-uidity offered by demand deposits, banks pay lo$ interest 1in case of savings account2 or no interest 1in current accounts2 on such deposits. "ost of maintaining the demand deposit accounts is high in vie$ of the large number of transactions involved. The higher transaction cost is an important reason for payment of interest at lo$er rates or no interest on demand deposits. This makes it a lo$3cost deposit for the banks and it is much sought after by banks. Both current and savings put together, is popularly kno$n as "ASA deposits in Banks and in the present competitive banking scenario, every bank eyes for capturing larger share of "ASA &eposits to improve their profit margins. *enerally, interest is calculated on daily closing balance on such deposits and paid at specified fre-uency 1generally half3yearly2. Banks also prescribe certain minimum balance to be maintained in savings accounts. @hile some banks insist on a minimum balance at all times, others insist on an average minimum balance during a specified period 1generally during a period of three months2. 5inimum Balance is the amount of credit balance a customer>s is re-uired to maintain in the Savings > "urrent Account at any point of time. #f the minimum balance drops belo$ the prescribed level, banks levy charges for non3maintenance of minimum balance. Some banks prescribe a minimum average relationship value. i.e. combined average balance in the several savings accounts > fixed deposit accounts maintained by the customer. Almost all the banks generate and send statements of accounts on periodical basis to the customers to keep track of the transactions in their account. Some banks used to issue passbooks to savings account. The follo$ing facilities are offered in savings account "ash deposit and $ithdra$al "learing of local che-ues "ollection of upcountry che-ues /lectronic funds transfer &ebit "ards Access to AT5s of even other partner banks Access to #nternet banking Access to phone banking services Access to mobile banking services Any$here banking services Standing instructions for making regular payments /lectronic "learing Services 1/"S2 facility for making regular payments like telephone bills, other utility payments, loan repayments and also for receiving dividends, interest and pension. Automatic $ithdra$al of fixed deposits to meet shortage of funds in savings account by linking fixed deposits to the savings account 1reverse s$eep from fixed deposit to savings account2.

Types of Balances in Demand Deposits Book Balance 3 This balance is arrived at taking into account all transactions that have been posted to the account including cleared items and non3cleared items. Cleared Balance 3 This balance is arrived at after taking only the cleared transactions.

Available Balance 3 This balance is arrived at after taking into account all transactions including cleared items and non3cleared items. But the $ithdra$als are not allo$ed on the un3cleared balance. Available balance $ill also include any overdraft limits provided to the customer. But this excludes the portion of balance on $hich there is lien > freeze marked in the account.

2verdraft Facility Overdraft is a facility available to a customer provided by a bank. This is an arrangement $ith the bank $hereby the customers can dra$ from their current or savings account a certain amount over and above the balance in their accounts. Since the customers are allo$ed to dra$ over the balance in their account, the facility is called an Overdraft 1O&2. Overdrafts are of t$o types namely Temporary overdraft or permanent overdraft. Temporary overdrafts are provided to $ell kno$n customers in times of emergency for a shorter duration of time or for specific transactions only. +ermanent overdraft is usually given for one year and rene$ed every year sub4ect to certain conditions. The amount up to $hich over dra$ings are permitted is called the GO& 'imit6. The customer $ill be charged interest to the extent of amount overdra$n from the savings>"urrent account. O& limits may be unsecured or secured by fixed deposits or any other securities. @hen the fixed deposit amount is matured and if the customer is not $illing to rene$ the same, the proceeds of the fixed deposit $ill be ad4usted to$ards the overdra$n amount in the savings>current account and the overdraft facility $ill cease to exist. Issue of Che'ues The account holder of a Savings or a "urrent Account could opt for che-ue book facility $ith the bank. Once a che-ue book is issued, the customer is expected to make all $ithdra$als from the Savings>"urrent Account through "he-ues only. *enerally, the banks issue che-ue books to the customer, free of any charges. But under special circumstances the banks may charge a nominal amount to$ards issue of che-ue books. "top #ayment of Che'ues An account holder, $ho has issued a che-ue from his account to a third party, may for various reasons re-uest the bank not to honor the che-ue. This is called Stop +ayment of "he-ue. The account holder $ill give the che-ue particulars like che-ue no, che-ue date, che-ue amount and the person to $hom the che-ue is issued to the bank as reference. The bank on receiving this instruction $ill record the che-ue details and track the che-ue each time a che-ue comes for payment from the customer6s account. @hen the relevant che-ue comes for payment, the payment $ill be refused by the bank. The bank $ill also inform both the customer and the third party to $hom the che-ue $as issued by the customer. Banks may charge stipulated fees from the customer for this service. Stop +ayment of che-ues could be re-uested for Savings or a "urrent account. Only the dra$er of the che-ue could issue Stop +ayment instructions or a person authorized to operate the account. The dra$er of the che-ue only could revoke a che-ue under Stop payment.

"tanding Instructions A customer, $ho is re-uired to make periodic payments to satisfy various obligations, need not make repeated $ithdra$als from the savings Account. #nstead the customer could issue a Standing #nstruction to

the bank to make the periodic payments to$ards his>her obligations. The bank $ill act upon the instruction, debit the account of customer and make payments as re-uired. The features of this facility are as belo$ S# could be set up for specific payments>transfers like payment of !ecurring &eposit installments on monthly basis, payment of utility bills of the customer. "ustomer has to specify the account number and the amount to be debited, the beneficiary, the start date and end date of Standing #nstruction. The bank $ill carry out the Standing #nstruction on the designated dates as specified by the customer automatically till the end date or as re-uired by the customer. The customer as desired could revoke the Standing #nstruction in $hich case the bank $ill stop debiting the customer6s account. The banks generally charge the customer for this service. @hen a S# is setup the customer is expected to hold sufficient balance in the account to meet the S#, #f a S# is dishonored for $ant of funds, the banks may treat the same as dishonor and charge the customer for the same.

Interest Accrual The process of calculating interest amount from the last interest application day till the next date of #nterest application is called #nterest Accrual. #n this case the #nterest amount to be credited to the account is calculated but not yet credited. #nterest accrual may be for debit interest or credit interest and applies to both Savings ) "urrent accounts. Interest Booking Banks do #nterest Booking 1provisioning2 activity during the month end > -uarter end > half year > year end, from the last applied date till the end of period as above for those account $here next interest application date is still not yet due as at the above end of period. This process $ill pass accounting entries usually not at the individual account level but at the *eneral 'edger level to reflect the correct interest expenditure > income for the period. Such provision entries are either reversed on the next $orking day or at the time of next interest application. Interest Application The process of crediting the interest to the account of the customer and debiting the *eneral 'edger account is called #nterest Application. #nterest Application is done on pre3determined fre-uency as decided by the bank. This process of crediting the interest to the account of the customer is normally called as #nterest +osting. Account "tatus The status designated to Savings or a "urrent account, by the bank depending upon the operation of the account is called as an Account Status. The different types of account statuses are listed belo$ Active 3 This status is assigned to an account, $hich is in continuous operation 8-3 3 This status is assigned to ne$ly opened accounts and such ne$ accounts are closely monitored for the first six months, to ensure happening of genuine operations and not any irregular > abnormal operations in the account. Inactive 3 This status is assigned to an account $ithout customer activity for a specified period of time. Dormant 3 This is 4ust like #nactive status, $here the account is $ithout any customer activity for a specified period of time.

Closing 3 This status is primarily assigned $hen a customer $ishes to close an account but has outstanding checks. "redits and deposits into the account are not allo$ed to accounts in closing. Closed 3 This status follo$s the closing status and after the balance in the account becomes zero and after the expiry of the stipulated number of days for zero balance maintenance. This sentence may be added ;@hile it is possible to move accounts $ith all other status to A"T#Q/ status, "'OS/& account $ill become permanently closed and it cannot be brought back to any other status. FroDen 8 This status restricts certain external monetary transactions from posting to an account. This status is most commonly used $hen legal action is taken against an account holder.

Time Deposits These are the deposits types $hich repayable to the customer at the expiry of contracted period of time. The follo$ing are a fe$ types of Time deposits ,ixed &eposit accounts !ecurring &eposits

Fi1ed Deposits As the name indicates, fixed deposits are accepted for fixed period ranging from seven days to five years. The period may vary from country to country. They are repayable only after the period for $hich they are deposited. #nterest on fixed deposits is paid at regular fre-uency 1like monthly, -uarterly2 during the period of the deposit at fixed agreed rate of interest. The interest can also be re3invested in the fixed deposit account. #n this case, the deposit earns interest on interest and hence called cumulative fixed deposits. &ue to lo$ li-uidity, the rate at $hich interest is paid on fixed deposits are higher than on savings deposit. The minimum amount of deposits varies from bank to bank $ith additional deposits in multiples of certain units 1like NBBB2 and depends on the nature and term of the deposit. Banks may or may not permit the pre3mature $ithdra$al. #n this case, interest $ill be paid only for the period for $hich the deposit has remained $ith the bank. The bank may also levy penalty for early $ithdra$al > closure. +remature encashment $ithout any penalty is offered as an incentive to attract deposits. #n case of fixed deposits that are units based, customer can prematurely $ithdra$ partial amount of deposits in multiples of re-uired units. +remature and penal interest are levied only on the $ithdra$n units and other un3dra$n units continue to get contracted rate of interest. @henever interest rate revision happens up$ards, entire fixed deposit can be prematurely closed $ithout any penalty, for the purpose of extension of deposits to get higher rate of interest benefit. .o$ever such a deposit should be extended for the full amount and for the duration that stretches beyond the original maturity date. To help customers tide over temporary re-uirement of funds, banks may offer loans against fixed deposit up to 9L: 1or as stipulated by the individual banks2 of the value of deposits. The rate of interest on the loan could be N: or E: over and above the rate paid on deposit. On maturity, the deposit $ill be automatically ad4usted against the deposit and only the balance, if any, $ill be repaid to the customer. Banks $ill also deduct tax from the interest paid on fixed deposits, either for the full interest earnings or if the amount of interest paid to a customer exceeds certain amount in a financial year. The tax rule may vary from country to country depending on the rule stipulated by the country. The tax $ill be deducted at source 1T&S2. The rate at $hich T&S is deducted also varies from country to country and from customer to customer depending on the type of the customer. The T&S deducted have to be paid to the tax authorities by the banks.

Bank issue a separate receipt of each fixed deposit. The fixed deposits can be encashed or rene$ed on maturity. Automatic rene$al of fixed deposit is also possible, incase the deposit holder places formal instruction for rene$al. On the date of maturity, such deposits $ill be rene$ed automatically for the similar period as the original deposit at the rate prevailing on the date of rene$al. The fixed deposit receipt 1,&!2 has to be surrendered to the bank at the time of rene$al of encashment. Bank may also issue duplicate ,&!, incase the ,&! is lost or misplaced. ,ixed deposits cannot be paid by cash over and above certain amount as fixed by the bank or by la$ enforcing authorities. !epayment on such deposits has to be by che-ue in the name of the depositor or by credit to the savings or current account of the depositor. & in $ Account E in N accounts are ,& linked savings account, $hich gives li-uidity as savings account as $ell as higher interest rate as fixed deposit account. The money on the savings account in excess of the stipulated amount is s$ept into a fixed deposit 1by auto s$eep instructions2 for a particular period. This carries an interest rate higher than the savings account interest rate. #f the money in the savings account is insufficient to meet any debit transaction, the shortfall is $ithdra$n from the latest fixed deposit and credited to the SB account automatically 1reverse s$eep2 for honoring the che-ue. ,eatures of E in N account S Auto "=eep facility 8 5aximum returns Balance in excess of stipulated amount is automatically transferred to a fixed deposit 1,&2 for a period as instructed or as per the product. The transfer 1auto s$eep2 $ill be done daily > $eekly depending on the bank policy ,& formed through auto s$eep $ill carry the rate of interest prevailing on the date of Auto s$eep. S Reverse "=eep facility 8 5aximum li-uidity This facility $ill give easy access to funds in ,ixed &eposit accounts #ncase of shortfall in savings account to honor any che-ue or debit instruction, ,ixed &eposits $ill be automatically broken to that extent of the shortfall. The remaining balance in ,ixed &eposits $ill continue to earn higher interest at the original rate applicable to the ,ixed &eposits. ,ixed &eposits $ill be broken in multiples of some fixed amount as stipulated by the bank. ,or the maximum benefit of interest, they $ill be broken on 'ast3#n3,irst3Out 1'#,O2 basis. i.e. the fixed deposit last opened > created is broken first. S Automatic Rene=al Facility @hen fixed deposits mature, they get automatically rene$ed $ith principal and accrued interest for a default period 1as per the product feature2 or for a longer period, if specified by the depositor. All existing terms on payment of interest and premature closures as applied to existing fixed deposits shall apply to fixed deposit linked to the savings account.

Recurring Deposits !ecurring deposits are for the benefit of those $ho $ould like to save a fixed sum every month over a longer period of one to five years. #t is e-uivalent to making fixed amount, as fixed deposit every month in such a $ay that all the fixed deposit $ill mature on the same date. Since it is inconvenient to issue fixed deposit receipts on every month, the monthly deposits are accumulated in an account. #nterest paid on recurring deposits usually at the rate applicable to fixed deposit as the deposits cannot be $ithdra$n before the due date. ,or default in making deposit in any month or for premature $ithdra$al, bank $ill levy penalty.

The maturity value of the recurring deposit account $ill be indicated to the depositor assuming that the monthly installment $ill be paid regularly on the due date. #f any installment is delayed, the interest payable in the account $ill be reduced and $ill not be sufficient to reach the maturity value. .ence the difference in interest $ill be deducted from the maturity value as a penalty. The rate of penalty is fixed upfront. Tax 1T&S2 is not applicable to interest paid in !ecurring &eposit accounts. #nterest accrual 1including catch3up accrual2 and interest payment #nterest can be paid in any of the follo$ing modes by cash by banker6s che-ue by transfer to savings account by transfer to *' account by transfer to loan account

@hen interest becomes payable, the tax on interest, if any, must be deducted from interest and credited to tax $ithheld account and the net interest should be credited to the interest payable account. Interest capitalisation,compounding "apitalizing > "ompounding interest involves no payment of interest to the customer, but it is notionally credited to the Time &eposit Accounte > "umulative Type of &eposit. Thus the customer $ould be eligible for higher rates of returns on the #nvestments made. At the time of maturity of the Term &eposit > "umulative Type of &eposit, the #nterest amount is paid out. +aturity of time deposit @hen a time deposit matures, the principal and>or interest can be paid out or rene$ed as per maturity instructions or force3rene$ed if there is a lien on it. The principal and>or interest can be paid out by cash, by che-ue or by transfer to savings account.

3hat is a Retail !oan 7


Banking is defined in terms of the intermediation role played by them as, accepting deposits and lending or investing the funds is indeed the primary functions of banks. 'ending has been the largest source of income for the banks in terms of interest income. *reater competition amongst banks, led to the banks looking to broad base their lending activities by targeting retail customers or individuals. !etail credit encourages economic gro$th by generating demand for products and services as purchasing po$er of individual6s increases. !etail loans are loans given to individuals for meeting one time re-uirements like buying tangible goods like a car 1auto loans2 or a house 15ortgage loans2 or for meeting large one time expenses like on hospitalization, education, marriage etc..1"onsumer loans2. ,rom Bank6s perspective, retail credit is less risky and more profitable compared to business > corporate lending. Characteristics of Retail Credits Small loan sizes 'arge number of customers 1$ell diversified portfolio2 Target customers are normally an individual or small enterprise Standard product offering to simplify process and delivery &ecentralized and -uick credit decisions 8 to improve customer satisfaction "entralized operations 8 to reduce cost

!isk 5anagement at portfolio level rather than at individual account level 8 to reduce cost and manage risk more effectively.

Components of a !oan #rincipal This is the amount borro$ed. ,rom the point of vie$ of the bank, this is the amount of loan it gives to its customer. #t represents an asset for the bank and a liability for the borro$er. Interest This is the cost the customer pays for borro$ing money from a bank. #t is computed as a percentage of the amount borro$ed. @hile the principal represents an asset for the bank, interest represents income earned by the bank. #nterest is computed on the principal outstanding in the account. +ethods of Interest Calculation Reducing Balance +ethod The interest rates -uoted by banks are based on a reducing balance method. #n this method interest is computed on the principal outstanding on a specified fre-uency 1such as daily, monthly or -uarterly2 on the principal outstanding in the account. Therefore $hen the customer makes repayment of some portion of the loan, the principal outstanding $ould be reduced by the amount of principal received and the interest $ill then be computed on the reduced amount 8 hence the term, reducing balance. #n this method, the more often the interest is computed the more beneficial it $ould be for the customer. Flat Rate +ethod This method of -uoting interest rates is mostly used by financial services companies. #n this method, the interest is computed at the beginning for the entire term of the loan. This method does not take into account the reduced principal at the end of a repayment period, $ith the result that the interest may be substantially higher than the amount the customer pays using the reducing balance method for the same rate of interest. Fees and Charges Banks collect various fees and charges from customers for loans. @hen the loan is being disbursed to the customer, banks may collect a processing fee associated $ith the loan3related paper$ork, and later they may collect other charges. These include insurance premium to be paid by the customer to$ards insurance of the collateral, inspection charges to be paid by the customer, service charges for certain types of transactions, commitment fee etc. These fees and charges represent income for the bank. Concepts in !oans *enerally the entire amount is given to the borro$er upfront. #n some cases like buying flat under construction, the loan may be disbursed in installments according to the payments to be made to the builder. *enerally the repayment start after the entire loan is disbursed. Till then, only interest is recovered from the borro$er. 'oans are to be repaid in periodic installments such as monthly or -uarterly that is fixed according to the periodicity of income of the borro$er and as per the loan product conditions. #nterest is charged by banks, every month, on the balance outstanding in the loan account. As the loan gets repaid, the interest burden of the borro$er comes do$n. !etail loans are generally recovered in /-uated 5onthly #nstallments 1/5#2. The amount payable every month is determined by calculating the total interest payable assuming that the installments are paid according to the schedule and dividing the total of loan and interest amount by the number of months over

$hich it has to be paid. +art of /5# is appropriated or ad4usted to$ards interest and the balance to$ards the principal. Cormally, the full cost of the assets is not financed. The borro$er is re-uired to put in a portion of the amount, $hich may vary from NB: to HB:. The amount contributed by the borro$er is called Gmargin6. 5argin is insisted upon to take care of depreciation in value of the asset soon after it is purchased and also to increase the commitment of the borro$er to repay the loan and protect the asset. #f a person $ho has taken a loan for buying a car defaults in repayment, the bank can take possession of the car and sell it to recover the loan. @hen the bank has recourse to a specific property or asset for recovery, the loan is said to be Gsecured6 loan. At the time of granting the loan, borro$er gives the bank the right by signing a document to take possession and sell the asset. This activity is called Gcharge6 creation over the asset in favour of the bank. @hen a loan is given for consumption purpose 1consumer loan2 and no specific security 1asset2 is available to the bank, the loan is said to be G(nsecured6 loan. The features of retail credit are Types of facilities Secured > unsecured facilities *uarantee #nterest Tenure 'oan to Qalue ratio 'oan eligibility "redit scoring Cegative caution list /-uated 5onthly #nstallments

Types of facilities* &ifferent types of credit facilities offered to retail customers are !oans* @hen the entire amount of credit is Gdisbursed6 or made available to the customer upfront and every deposit or Gcredit6 into the account is treated as repayment, the facility is called a loan. A loan is a one time facility and once an amount is repaid it cannot be $ithdra$n by the customer as it $ill be ad4usted against the amount outstanding in the loan account. !epayment could be after a period, in one installments could be monthly, or -uarterly or half yearly or any other periodicity as mutually agreed bet$een customer and the bank

2verdrafts Overdra$ing means $ithdra$ing more than the credit balance in the current > savings account. /very subse-uent credit into the current account $ill be ad4usted against the overdra$ing to$ards payment. Such short term over dra$ings are called GTemporary Over &raft6 or TO&. TO&s are expected to be repaid in about a $eek.

Banks $ill provide overdraft facility on permanent basis by setting up permanent O& limit enabling the customer to overdra$ the account up to a limit and $hen he re-uires and to repay it according to his convenience. @hile every credit is ad4usted against the amount outstanding, the customer can again $ithdra$ up to the sanctioned limit 1unlike a loan account2. .ence, $hile loan is a one time facility, an overdraft is a running or continuing facility. Overdraft limits are generally granted for one year and are secured by shares, bonds, bank6s term deposits and such other financial assets. Bank may roll over or extend the limit for another year at the end of one year at the discretion of the bank.

"ecured , 4nsecured facilities "ecured facilities Secured loans are al$ays secured by an underlying asset against $hich funding is extended like in the case of an overdraft against shares. This is also called asset based lending. A specific Gcharge6 is created on the asset against $hich funding is extended. A charge on an asset gives the lender the right to take possession of the asset and sell it to recover the loan in case of default. #n the case of immovable properties, i.e. land and building, the charge is called Gmortgage6 #n case of moveable assets like vehicles and goods the charge usually created is called Ghypothecation6. #n both the charges, the asset continues to be in the possession of the borro$er, but in case of default, the lender can exercise his right to take possession and dispose of the asset sub4ect to completing legal formalities, namely, filing a case and obtaining an order from the court. On financial assets like fixed deposits and bonds, charge is created by marking ;lien=. 'ien gives the right to the lender to appropriate the deposit or bond and ad4ust it against the loan. #n case of shares, charge is created by marking Gpledge6 in the demat account. #n pledge, the possession of the shares passes on to the lender. .ence the lender can straight a$ay sell the shares on default and there are no legal formalities to be completed.

The different kinds of secured loans are 5ortgage finance Qehicle loans o "ar loans o T$o $heeler loans o "ommercial vehicle loan "onstruction and material handling e-uipment loans +rofessional e-uipment loans for purchasing medical and office e-uipments 'oan against securities 1shares, bonds etc..2

Collateral

The ;security= charged to the bank is also called ;collateral=. The $orld collateral has t$o meanings7 N. Security given as guarantee for repayment of loan E. Additional but subordinate Banks use the $ord collateral in both senses. #n retail credit,= collateral= is used to refer to the security $hether primary or additional. @hen granting a housing loan in addition to the mortgage of the house, the bank may take some additional security such as pledge of fixed deposit or shares. Both the main and additional security is referred to as collateral. #n corporate > business credit, the asset financed is called the primary security and any additional security is called as collateral. Some banks use the $orld collateral to refer to additional security only. 4nsecured !oans (nsecured loans do not have any underlying security and are extended purely on the basis of credit $orthiness of the applicant. The different kinds of unsecured loans are +ersonal loans "redit "ards

uarantee A guarantor is a person, other than the borro$er, $ho promises to pay the loan to the lender in case of default by the borro$er. Some banks make the guarantor as co3borro$er $hile some others take only a letter of guarantee. *uarantor6s ade-uacy of his income to repay the loan in case of need $ill be assessed by the banks before accepting a person as a guarantor.

Interest The t$o types of rate of interest are ,ixed rate of #nterest #nterest $ill be charged throughout the tenure of the loan at the rate fixed at the time of granting the loan. ,loating rate of #nterest @hen the rate at $hich interest is charged on a loan varies from time to time, according to movement of interest rate, it is called a floating rate loan. The floating rate $ill be changed according to change in the benchmark rate.

Tenure The period over $hich the loan has to be repaid is called the tenure of the loan. Tenure $ould depend upon the amount of loan and the repayment capacity of the borro$er. The maximum tenure permitted $ould depend upon the period over $hich the asset financed could depreciate or reduce in value. Tenure $ould also depend upon the age of the customer. Tenure $ould also depend on type and purpose of lending product

+oratorium +ayment of /5# may commence after fe$ months from the date of full disbursement of loan. Such repayment holiday is called ;5oratorium=. #nterest during the moratorium may have to be paid separately as in the case of +re3/5# or may be added to the principal and the /5# is calculated accordingly. CapitaliDation "apitalization is defined as the process of satisfying unpaid interest or fees by adding them to, and increasing, the principal balance of a loan. Any interest due from the customer is added to the principal outstanding 8 $hile this $ould not increase the amount due from the customer, it $ould change the nature of outstanding from interest and principal to principal only. This process of adding the interest due to the principal and reducing the interest due to Tero is called capitalization. !oan to 6alue Ratio .!6R/ The maximum percentage of the value of the asset that $ill be given as loan. 'Q! varies according to the nature of asset and the rate at $hich the asset is expected to depreciate. An 'Q! of 9L: means that the maximum loan that can be considered for purchase of the asset is limited to 9L: of the value of the asset.

!oan -ligibility 'oan eligibility is determining the maximum loan amount that can be offered to a customer. This is determined based on the follo$ing criteria o "apacity to repay The customer should have ade-uate income to repay the loan. ,or example, for salaried person, the persons6s disposable income is considered to assess the repayment capacity. Cormally, banks consider LB: of the disposable income as ade-uate to meet the repayment obligation of the loan applied for. The percentage may vary from bank to bank and product to product. #ncome stream of the customer should be consistent and stable. The income is validated by income tax returns. o 'i-uidity to repay The customer should be having li-uidity at the point of time $hen his repayment is due. Surplus > additional income 1if any2 is also taken into consideration for assessing li-uidity. The li-uidity to repay is validated by checking bank statements, nature of business > profession, repayment track record etc..

Credit "coring "redit scoring is a statistical method for predicting the credit $orthiness of applicant for credit. Banks are able to offer loan approvals online based on the credit scoring methodology. "ustomer6s relative importance is assessed on the basis of analysis of the past loans and various other parameters. @eightages are assigned to each measure of the variable criteria. The $eightage may be assigned based on the follo$ing variables Age of the customer Uualification of the customer #ncome per month

@eightages are assigned to each variable and the total score is calculated. #f the total score is above a cut off limit, the loan is approved else it is re4ected. @ithout the human engagement and analysis 1done by credit appraisers2, it is not possible to build a complete ob4ective score card for customers.

The advantages of credit scoring are ,acilitates -uicker decision making !anks applications according to risk involved 5inimizes sub4ectivity in credit approval "an also be used as a basis for portfolio rating

8egative , Caution !ist This is a list of certain profile of customer segments, $hich have in past exhibited higher tendency to default. 'ist of classification are hereunder +rofile > occupation of the customer 8 based on the past experience and analysis of existing portfolios, persons in certain profession $ho are kno$n to have higher default rates may be identified in the negative list. The location of the customer from a particular area $ho tends to default is classified as caution or negative areas. +ast repayment history of customer 8 The list contains information about the past borro$ings and repayment history of the customers collected from various sources 1including credit bureaus2

-'uated +onthly Installments The statement given to the borro$er giving details of repayment over the tenure of loan is called G!epayment Schedule6 The /5# is calculated by first calculating the total interest payable during the tenure of the loan assuming that it is repaid over the period in regular installments, adding the total interest to the principal and dividing the total amount by number of months in $hich the loan is to be repaid. AmortiDation The process of splitting the /5# into principal and interest component to facilitate crediting the interest component to the profit and loss account and the principal component to the loan account is called ;amortization=. #re:-+I As the /5# is calculated on the full amount, /5# cannot be calculated till the entire loan is disbursed. #n case of housing loan, the loan may be disbursed over a period of time in installments, $hich depends upon the progress of construction. Though the loan is not fully disbursed and /5# is not calculated, the borro$er has to pay interest for the amount, $hich is already disbursed. Such interest payments are called ;+!/3 /5#= payments. Advance -+I Cormally, /5# payments are to be made in Garrears6 or at the end of the month. #t is possible to calculate

/5# on the assumption that the /5# is paid at the commencement of the month. #n that case, the first /5# $ill become payable immediately after disbursement of loan. The first /5# taken at the commencement of the loan is called ;Advance /5#6.

3hat is a +ortgage 7
This chapter introduces the various concepts related to 5ortgage. A mortgage is defined as a loan to finance the purchase of real estate, usually $ith specified payment periods and interest rates. The borro$er 1mortgagor2 gives the lender 1mortgagee2 a lien on the property as collateral for the loan. According to the transfer of property act, mortgage is ;Transfer of an interest in specific immovable property for the purpose of securing the payment of money, to be advanced by $ay of loan.= Concepts 5ortgage is very similar to hypothecation in that both o$nership and possession remain $ith the borro$er 1mortgagor2 and the bank 1mortgagee2 gets the right to take possession and sell the mortgaged property after filing a suit and getting permission of the court. &uring the subsistence of the mortgage, the borro$er cannot sell the property $ithout the consent of the bank 1mortgagee2. Types of mortgages* !egistered 5ortgage /-uitable 5ortgage

Registered +ortgage A registered mortgage is one $hich is registered $ith the registrar of properties $ith $hom sale > purchase of landed property is re-uired to be registered. The mortgage $ill be kno$n to anyone $ho checks the property record. +roperty $ill be released from the mortgage by filing a cancellation deed $ith !egistrar to enable him to record the release in the property record, once the loan is repaid in full $ithout any due. A registered mortgage is the most secured $ay of creating charge over an immovable property. -'uitable +ortgage +roperty is not re-uired to be registered. The /-uitable 5ortgage in real term is kno$n as ;5ortgage by deposit of Title &eeds=. The essential characteristics of /-uitable 5ortgage are Original Title deeds has to be handed over to the bank along $ith Tax receipts and the Con3 /ncumbrance certificate obtained from registrar sho$ing the property is free from all encumbrances. #ntension to create mortgage Banks $ill obtain a memorandum of deposit on plain paper $herein the borro$er affirms the fact of deposit of title deeds $ith the intention to create mortgage. At places notified by the *overnment The property that is mortgage may be situation in any place, but the title deeds must be deposited only in to$n > cities notified by the *overnment for creation of /-uitable 5ortgage.

5ey #layers in the +ortgage Business #roperty Developers 3 The people $ho build homes or develop plots of land Borro=er 8the prospective buyer of the home or plot

Financial Institution 8 The entity $hich provides the necessary finance to the borro$er to buy the home or plot

Types of +ortgage !oans : Conventional The follo$ing are the types of 5ortgage 'oans most prevalent in the industry ,ixed !ate 5ortgage 'oan Ad4ustable !ate 5ortgage 'oan 1A!52

Fi1ed Rate +ortgage !oan ,ixed !ate 5ortgage loans are those loans $here the monthly payments for interest and principal remain fixed and does not change during the tenure of the loan. AdAustable Rate +ortgage .AR+/ !oan A!5 or Ad4ustable !ate 5ortgage loans also kno$n as Qariable > ,loating !ate 5ortgage loans. #n these types of mortgage loans, the interest rate changes from time to time during the tenure of the loan according to some outside index. The interest rate changes could happen based on various parameters like the change in the base rate 1as fixed by the bank2 on $hich the loans are offered. Categories of +ortgage !oans 5ortgage loans are available for the follo$ing purposes +urchase of !esidential sites +urchase of !eady built houses +urchase of ,lats "onstruction of houses /xtension > (pgradation of existing houses !epairs ) !enovation of existing houses

+ortgage #rocess Flo= Qarious processes involved in a 5ortgage loans from the application stage to the 5ortgage 'oan closure stage have been explained belo$

Application "ubmission Borro$er submits the completed Application to the 5ortgage "ompany along $ith the re-uired documents and the re-uisite Application ,ee. The documents that $ould be re-uired include #n case of /mployed borro$ers o +ay3slips o Other #ncome proofs o Tax !eturns o Other 'oan details o Assets and 'iabilities o Bank Statements o The above details $ill be re-uired for the "o3borro$ers also #n case of Self3/mployed borro$ers o Tax !eturns o #ncome ) /xpenditure Statement o Balance Sheet o Other 'oan &etails o Bank Statements o The above details $ill be re-uired for the "o3borro$ers also #n case of "onstruction o +roof of 'and property in the name of the borro$er o /stimated "ost for construction o Cecessary approvals for "onstruction #n case of +urchase of +roperty o Agreement $ith the +roperty &eveloper o Schedule of "ompletion of property

Application "crutiny The 5ortgage "ompany verifies and validates the follo$ing 5ortgage 'oan Application #ncome &etails of both the Borro$ers and "o3borro$ers +roperty O$nership &ocuments On satisfactory verification and validation of the above documents the borro$er>s $ould be intimated of the acceptance of their application

Credit Appraisal ) Report The 5ortgage company $ould carry out an appraisal of the loan documents from three angles namely ,inancial Appraisal 3 $hich includes o !epayment capacity of the borro$er and co3borro$er o ,inancial stability of the borro$er and co3borro$er o +revious borro$ing history of the borro$er and co3borro$er o Qerification of Salary details $ith the borro$er6s employer o Bank account transactions o Uuality of collateral security offered Technical Appraisal 8 $hich includes o Qalidity of Approvals for "onstruction o "ompliance $ith local building la$s o /stimation for construction o "ondition of property to be financed in case of purchase o Qisit to Site to verify the property to be financed o Qaluation of +roperty 'egal Appraisal 8 $hich includes o "ollection of property documents > Title deeds o Obtaining legal opinion about the title from la$yers o "reation of mortgage o Applicability of la$s like Transfer of property act, Stamp act, !egistration Act o Qerifying succession of property, flo$ of title , encumbrances if any o +reparation of 'egal Scrutiny !eport

"anction of !oan The mortgage "ompany, once satisfied that the 'oan Application and related documents are acceptable from ,inancial > Technical and 'egal angles for providing a loan, issues a 'etter of Sanction to the borro$er $ith the follo$ing details 'oan amount offered #nterest !ate applicable for the 'oan Term of loan Amortization Schedule containing the 5onthly !epayment Amount 1/5#2 !epayment conditions Qalidity of Sanction Obtaining loan acceptance letter from borro$er Borro$er $ould be re-uired to pay Administrative > +rocessing ,ees at this stage

Documentation

After the Sanctioning of the loan, the 5ortgage company $ill carry out the 'oan &ocumentation +rocess. This is the stage $here the 5ortgage for the property is created. The indicative documents that $ould be created are as follo$s o &eposit of Title deeds in original o 5ortgage 'oan Agreement bet$een 5ortgage "ompany ) Borro$er>s o "ollection of +ost &ated "he-ues or &irect &ebit mandate o 'etter of guarantee o 'etter of +ledge 1in case of additional securities2 o Tripartite agreement bet$een Builder, borro$er ) 5ortgage "ompany

Disbursement of !oan On completion of the 'oan &ocumentation, the 5ortgage "ompany $ould disburse the loan amount as per the re-uest of the borro$er. #n case of purchase of ready property, the disbursement $ould be in a single amount. #n case of construction of the property, the disbursement $ould be in multiple pre3agreed installments #n case of single disbursement, the 'oan !epayment $ould start from the next subse-uent month during $hich the disbursement is made. #n this case, the borro$er $ould be re-uired to pay +re3 /5# interest from the date of disbursement till the last $orking day of the month. #n case of multiple disbursements, the borro$er $ould be re-uired to pay +re3/5# from the date of first disbursement, till the last $orking day of the month in $hich the last disbursement $as made

!oan Repayment On completion of the disbursement of the Sanctioned 'oan amount in full, the !epayment of 'oan starts. The repayment $ill normally start from the beginning of the next month subse-uent to the month during $hich the full and final disbursement $as made. The repayment of loan falls under t$o categories as discussed belo$. 8ormal Repayment Borro$er repays the loan by payment of the fixed /5# 1/-uated 5onthly #nstallments2 as specified in the Amortization schedule. !epayment $ould be by $ay of either &irect &ebit mandate or +ost &ated "he-ues provided during the sanctioning of loan. The repayment amount $ould be uniform throughout the mortgage term, unless there are special situations like !e3scheduling or !e3phasing of loans

#re:#ayment of !oan Borro$er sometimes may get additional funds and may decide to prepay either a part of the loan or the loan in full. #n case the customer decides to prepay the loan in full, then the final loan outstanding calculation $ould be done and the borro$er $ill be re-uired to pay the total outstanding amount and the loan account $ould be closed. This is called +re3closure of 'oan. #n case the customer decides to prepay only a part of the loan, then the loan $ould be re3scheduled and a ne$ loan balance and repayment schedule $ould be calculated and the borro$er $ill start to pay the ne$ /5# from the next month on$ards. *enerally at the discretion of the 5ortgage company a nominal percentage of the outstanding loan amount is levied as +re3"losure charges.

Re:scheduling of !oans !e3scheduling of loans means re3ad4ustment or re3calculation of the amortization schedule taking into consideration any pre3payments that have been done by the borro$er to$ards the loan account from the start of the financial year till the date of re3scheduling to arrive at a ne$ balance for the remaining period of the loan. !escheduling of loans $ould be done at the re-uest of the borro$er $ho $ishes to reduce his monthly repayment installments by making part prepayments in lump sum to$ards the loan outstanding. !escheduling of loans $ould be done in such a $ay that after rescheduling the entire outstanding liability at revised installment shall be paid $ithin the unexpired term originally fixed

Re:phasing of !oans There may be situations $here the borro$er defaults in the repayment of the loan obligations due to genuine financial temporary difficulties and the 5ortgage "ompany may decide to re3ad4ust the loan. The mortgage company $ill add back the unpaid installments 1dues2, overdue interest and any other charges back to the balance of the loan and arrive at a ne$ balance. This process is called as !e3phasing of 'oan. (nder this facility all the arrears > overdue amounts $ill be added back to the loan and a fresh repayment schedule 1amortization schedule2 $ill be determined, $herein the loan is repayable $ithin the unexpired period of the term granted originally

Closure of !oan @hen the borro$er has completed all the installments of the mortgage loan repayments as per the schedule, the loan account is said to be closed and this is called as ;Cormal "losure of 'oan=. @hen the borro$er decides to repay the loan in full before the completion of the Term of the loan, due to availability of funds, the loan account in this situation is also said to be closed but called as ;+re3closure of 'oan=. *enerally the mortgage company does not penalize the borro$er for Cormal closure of a loan account. But in case of +re3closure of loan, the mortgage company does levy a certain percentage as ;+re3closure "harges=. On closure of the loan account, the 5ortgage "ompany hand over all the original documents relating to the property to the borro$er and cancels all liens noted on the property and notifies the re-uired authorities. The borro$er becomes the absolute o$ner of the property henceforth.

Risks in +ortgage Qarious types of risks those are associated $ith 5ortgages. The risks can be classified as belo$ "redit !isk 'i-uidity risk #nterest !ate !isk +re3payment !isk !egulatory !isk /nvironment !isk

(ninsurable 'oss

Credit Risks 8 "redit risk refers to the risk of default by the borro$er for any reason. #t is possible that the business does not generate sufficient income to repay or the borro$er is not honest. This is the most serious risk any lender faces. !i'uidity Risks 8 The borro$er may have every intention to repay the loan and the business may be doing $ell too. .o$ever there could be occasions $hen the borro$er is not able to $ithdra$ funds from the business $hen the lender demands repayment. Interest Rate Risk 8 Another risk is due to change in the rate of interest in the market. At the time of the transactions the borro$er may have agreed to give the interest at the prevailing rate of, say, 9:. Subse-uently, interest may be reduced or increased #repayment Risk 3 +repayments can change the Account6s return because the mortgage company may not be able to reinvest the proceeds at high interest rate as the original mortgage loan rate. Regulatory Risks 3 *overnment regulation, including zoning la$s, property taxes, fiscal, environmental or other government policies, could operate or change in a $ay that hurts the Account and its properties. #t is also possible that the property may be ac-uired by the government for public purposes like $idening of roads etc. in $hich case the compensation may not be in tune $ith loan outstanding. -nvironmental Risks 3 The Account may be liable for damage to the environment caused by hazardous substances used or found on its properties. if the Account fails to comply $ith regulations re-uiring it to actively monitor the business activities on its premises, the Account may have difficulty selling or renting a property or be liable for monetary penalties. 4ninsurable !osses 3 "ertain catastrophic losses 1e.g., from earth-uakes, $ars, terrorist acts, nuclear accidents, floods, or environmental or industrial hazards or accidents2 are uninsurable or so expensive to insure. #f a disaster that $e haven6t insured against occurs, the Account could lose both its original investment and any future profits from the property affected. Types of +ortgage !oans in 4" @hen it comes to mortgages, there are almost as many choices as there are styles of homes. A fe$ of them are discussed belo$. FBA !oans ,.A loans are insured by the ,ederal .ousing Administration and are often referred to as a government mortgage. These loans re-uire lo$er do$n payments and accept higher debt ratios than a conventional mortgage so they%re good for some buyers $ho might not other$ise -ualify. @hile they re-uire lo$er do$n payments, they do re-uire a minimum cash investment of H: of the sales price. #f the do$n payment is less, the balance goes to$ard closing costs. An upfront ?mortgage insurance premium? 15#+2 is re-uired 1on a HB3year loan, the 5#+ e-uals N.LB: of the loan amount 3 E: for a NL3year loan2, plus an annual .L: rene$al premium for the life of the loan.

6A !oans QA loans are available to veterans and service personnel $ho have put in the re-uired service time in the

military. They%re guaranteed by the &epartment of Qeterans Affairs and, in most cases, re-uire no do$n payment. 'oan maximum may be up to NBB: of the QA3established reasonable value of the property. A E: QA loan funding fee is re-uired although a do$n payment $ill lo$er this fee 3 the fee is E.DL: for eligible !eserve>Cational *uard personnel. Co monthly mortgage insurance is re-uired.

Rural Bousing !oans These lo$3interest3rate home loans are offered through the !ural .ousing Service, a branch of the (S &epartment of Agriculture. They are specifically tailored to lo$ and moderate income persons $ho live in rural areas or small to$ns and re-uire no do$n payment. NBB: financing available $ith fixed interest rates HB3year term (S&A *uaranty ,ee re-uired on all loans +roperty location must meet (S&A standards #ncome and loan amount limits apply

Affordable Bousing #rogram .AB#/ !oans An A.+ mortgage can help lo$3to3moderate income families $ho cannot save for a do$n payment, but pay their bills and deserve the opportunity to o$n a home. Applicants $ill complete a take3home pre3 o$nership education course in order to make the home buying process easier to understand. ,ixed annual percentage rates 5ortgage credit insurance is not re-uired #ncome and loan amount limits apply .ome o$nership counseling re-uired

Fe= +ortgage !oan #roducts in 4" Home Purchase Loan This is a normal 5ortgage loan #nterest !ates options could be ,ixed !ate or Ad4ustable !ate 'oan +eriod may vary from NB3HB years

Mortgage Refinance 5ortgage !efinance is the process of re3mortgaging the same property for a lo$er rate of interest or higher period. There are three $ays refinancing can lo$er the repayment amount. The first is simply to refinance at a lo$er interest rate.

Vou can also change the term on your mortgage to lo$er your payment. S$itching from a NL3 to a HB3year term can significantly lo$er your mortgage payment. But, if long3term savings is more appealing to you, refinancing from a HB3year to a NL3year mortgage can save you thousands of dollars over the life of your loan. The third $ay to lo$er your payment is by s$itching from a traditional mortgage $ith principal and interest payments to a mortgage program that allo$s interest only payments. .ome /-uity 'oan A .ome /-uity loan is a ne$ trend of loans in the (S. (nder this scheme the home>property o$ner borro$s a sum of money from another mortgage company by $ay of entering into a second mortgage on the same property>home for $hich he already has mortgage. @hen you get a home e-uity loan, you are borro$ing against your o$nership stake in the house. The e-uity is the value of the house minus your mortgage balance. A home e-uity loan uses your e-uity as collateral. #f your house is $orth MEBB,BBB, and you o$e MNFB,BBB on the mortgage, you have MIB,BBB in e-uity. A home e-uity loan $ould allo$ you to borro$ some or all of that MIB,BBB. Vou receive an e-uity loan as a lump sum, and repay it over a set time, usually at a fixed rate and for the same payment each month. A home e-uity line of credit, or ./'O", is a type of e-uity loan that $orks like a credit card. #t has a credit limit and a revolving balance, meaning that you can borro$ up to a certain amount, pay some or all of it back, and borro$ again up to the limit. !ates on most lines of credit vary as the prime rate moves up and do$n. Because they come in a lump sum, home e-uity loans generally are recommended for one3time expenses 33 to consolidate credit card debt, pay for a ne$ roof, buy a business. /-uity lines of credit often are recommended for recurring expenses such as education expenses, or multistage pro4ects such as home renovations, or to hold in reserve for emergencies such as 4ob layoffs. A line of credit starts $ith a dra$ period and ends $ith a repayment period. &uring the dra$ period, the homeo$ner can borro$ against the credit line by using a charge card or a checkbook. 5inimum monthly payments cover only the interest during the dra$ period. @hen the repayment period starts, the monthly payments cover interest and principal so that the balance is repaid by the time the credit line expires. The length of the dra$ and repayment periods varies $ith the lender and size of the credit line

3hat is Clearing 7
"learing is the process of collecting the proceeds of a che-ue, a demand draft or a pay order deposited into an account. i.e. @hen a che-ue > demand draft > pay order $hich is dra$n on the other bank is deposited by the customer, it has to be sent to the payee bank and the amount is collected and deposited to the beneficiaries 1of the instrument2 account. Definition of Instrument* The Cegotiable #nstrument Act, N99N, defines a Cegotiable #nstrument as a promissory note, Bill of /xchange or che-ue. A Bill of /xchange or a +romissory Cote is an instrument in $riting containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. A "he-ue is a bill of exchange dra$n on a specified banker and not expressed to be payable other$ise than on demand. A che-ue is a bill of exchange $hich is al$ays dra$n on a banker specified therein and payable on demand. Types of Clearing* ,ollo$ing are the different methods of clearing.

'ocal "learing Cational "learing "he-ue collection /lectronic clearing System

!ocal Clearing* #f the che-ue deposited by a customer is dra$n on another bank in the same city it has to be sent to the payee bank and the amount collected. Since all the banks in a city $ill be getting che-ues dra$n in other banks and it is cumbersome to process, ;"learing house= is used to meet and exchange che-ues dra$n on each other. 'egally, a clearing house is an association of all banks at a centre $ith its o$n by la$s and management committee. "learing house is a place or office, $here the representative of all the banks $ill meet and exchange che-ues dra$n on each other. *enerally, the central bank of the country or a leading bank on behalf of the central bank of the country manages the clearing house. All the banks at that centre $ill maintain accounts $ith the settlement bank to facilitate settlement of the claims on each other. The payment is effected by the settlement bank by debiting and crediting the net amount payable. This is kno$n as net settlement. The instruments settled through clearing house are as follo$s "he-ues &rafts +ay orders @arrants /"S &ebits > "redits #ncome Tax !efund orders *overnment +ayment Orders

"ervice Center* Typically, in a location, a bank could have more than one branch. #n such a scenario, the bank $ill route the clearing operation through a separate branch kno$n as service branch or a processing center and this represents bank at the clearing house. The service branch > processing centre7 collects instruments from all the branches of the bank in that centre, sorts the instruments bank3$ise and presents them to the clearing house. +ICR Che'ues* The clearing process varies according to the types on the instrument used. To mechanize the process at the large centers, the central Bank has mandated that only 5#"! 15agnetic #nk "haracter !econgnition2 che-ues to be used. .ence Banks issue che-ue, draft and other payment instruments in 5#"! format using the special -uality paper and printing specifications. On 5#"! instruments, there is code line at the bottom containing information printed in magnetic ink, $hich is re-uired for mechanical processing. The code line contains the follo$ing information ,irst six numbers indicate the "he-ue Cumber Cext three numbers indicate city code Cext three numbers indicate bank code Cext three numbers indicate branch code

After some space there is a number for transaction code 1i.e. $hether the transaction is for a saving or current account2 The magnetic portion, $hen placed under 5#"! e-uipment, allo$s for instant readability and identification.

+ICR Che'ue Clearing #rocess Flo= The che-ue is deposited in the branch. All the branches send the che-ue received by them to service branch The encoding of the che-ues are done and sorted as bundles. The processed che-ues are sent to clearing house 1The che-ues sent to clearing house are called ;Out$ard "learing "he-ues=2 #n clearing house, bundles are sorted bank $ise. The che-ues dra$n on each bank $ill be sent to the respective service center 1The che-ues received from the other banks are kno$n as ;#n$ard "learing "he-ues=2 The service centers of each bank sort it branch $ise and send it to the branches for debiting the accounts of the customer. Banks $hich are fully computerized do not send the in$ard clearing che-ues to the branches, as all accounts can be accessed and processed in the service center itself. The return che-ues 1due to insufficient balance, stop payment instructions2 are returned to the respective banks through clearing house.

Reasons for Dishonour of Che'ues "he-ues > instruments could be dishonoured or returned by the dra$ee banks for the follo$ing reasons Stop payment instructions has been issued for the che-ue Account is closed #nsufficient ,unds !estrictions has been imposed either for posting any debits or any amount restrictions exist for the account. Any alteration in che-ues +hysical damage of the che-ue

8on:+ICR che'ue clearing process The primary difference $ith 5#"! and Con35#"! is that $ork of sorting the che-ues bank$ise. #n case of Con35#"! the presenting banks have to manually sort and consolidate bank3$ise. Bigh 6alue Clearing This is value added clearing service available in select cities for processing large value che-ues on same day to facilitate the customers to use the funds immediately. Che'ue Truncation "he-ue truncation refers to conducting clearing operations $ith digital images of the che-ues rather than

the physical che-ues. The presenting bank, instead of sending the physical che-ues to the clearing house $ill scan the che-ues $ith high speed scanners and transmit the scanned images to the clearing house electronically. The clearing house $ill in turn sort the images and transmit to each bank the images of che-ues dra$n on them. Since only scanned images $ill be sent, the physical che-ues $ill remain $ith the presenting bank itself. "he-ue truncation has been made possible by the development of imaging and communication technology. "he-ue truncation can help to speed up clearing operations and make it more cost effective. 8ational Clearing* "learing house handles che-ues dra$n on local branch only. "he-ues dra$n on upcountry branches are sent by each bank to their branch at that centre for presentation through the local clearing at that centre. The Cational clearing is a facility offered by clearing houses to collect upcountry che-ues through the clearing house system rather than each bank collecting such che-ues through their branches. The central Bank has linked up the clearing houses in the large cities to facilitate such collection $ith less time. Che'ue Collection* As the clearing 4urisdiction is local, a separate procedure has evolved for the collection of che-ues dra$n on banks outside the clearing house area. #n this case, the che-ues are sent by post for collection to the representative branch or correspondent bank for presentation in the clearing house in the outstation centre. Once the che-ue is realized, the proceeds are remitted to the original presenting bank for credit to the customer account. This leads to a significant delay in the payment of these che-ues and there is considerable uncertainty regarding the time of realization. &ue to delays in collection of outstation che-ues, various alternative forms of payments instruments are $idely used to settle outstation payments. Some of the payment items such as demand drafts, ;payable at par= $arrants etc., are much $idely in use in current day scenario. #n all these cases, $hether che-ues or drafts, the -uestion of settlement bet$een paying bank and the collecting bank remains. #n the case of demand drafts, the payment is usually internal to the bank and is settled by book transfers using an internal pipe line account maintained in the bank. #n the case of %At par% items, a single account maintained in any branch is debited and various paying branches are paid. Che'ues dra=n on the bankEs upcountry branches ,or a bank $hich is fully net$orked and has a centralized database, che-ues dra$n on any branch can be posted from any other branch. .ence, che-ues dra$n on upcountry branches can be processed as a transfer transaction at the branch $here the che-ue is deposited. "he-ues dra$n on other banks at locations $here the bank has branches. The che-ue has to be sent to the branch at the location for being presented in the local clearing. "he-ues dra$n on other banks at locations $here the bank does not have a branch There are H $ays of collecting such che-ues N. *ive the che-ue to a correspondent bank $hich has a branch at the location. A correspondent bank is one $ith $hom the collecting bank maintains a current account. E. *ive the che-ue to a non3correspondent bank H. Send it directly to the dra$ee bank. -lectronic Clearing "ystem .-C"/ 'et us suppose that the company has thousands of employees $ho maintains their accounts in various banks in the city. #t $ill be difficult for the employees if the company pays the salary by che-ue, $here in they have to deposit and collected through local clearing. This can be avoided through /"S $here the payer $ill give to his bank the list of payments to be made $ith bank details to authorize him to debit their accounts. The bank in turn $ill pass on the list to the clearing house $hich $ill distribute to amongst the banks concerned. There are t$o types of /"S

N. "redit /"S E. &ebit /"S Credit -C"* As name implies, this is used to credit the customer. ,or example the companies that declare the dividend $arrants can use this to give credit to all its shareholders there by reducing the cost of paying dividends. This is popular for mass payments such as dividends, interest, salary, commission to sales agents etc. "cheme Coverage The Scheme shall cover transactions of the follo$ing characteristics Bulk payment transaction like periodic 1monthly> -uarterly> half3yearly> yearly2 payments of interest> salary> pension> commission> dividend> refund by companies >corporations >government departments and such other organizations defined as ;(ser= The transactions to move from a single (ser source to a large number of &estination Account .olders. The credit transactions should pertain to the &estination various Bank Branches $hich fall under the 4urisdiction of the local Bankers6 "learing .ouse. The credit instructions from the (ser to the &estination Account .olders $ould be on magnetic tape>floppy 1 a form of electronic media that can be processed on computers2 and $ould form the basis for the Sponsor Bank to debit the (ser6s account and the &estination Banks to credit the &estination Account .olders6 Accounts. Such other payment transactions involving a single debit to a (ser6s account at one bank and multiple credits to a large number of beneficiaries at many banks to be specified by C"" after ascertaining the level of infrastructure available at the Service>5ain branches of member banks.

Debit -C"* (tility services companies such as electricity boards, telecommunication companies or banks for loan installment collection use debit /"S for collecting the amounts from consumers. This enables the companies to recover their dues in time and more cost effectively. "ustomer has to give &ebit /"S mandate in the specified form to the bank. /"S debit is also called as ;&irect &ebit= "cheme Coverage The Scheme covers transactions of the follo$ing characteristics !epetitive payment collections like periodic monthly> bimonthly> -uarterly> half3yearly> yearly2 payments of telephone bills > electricity bills > loan installments > insurance premium etc. by companies > corporations > government departments and such other organizations defined as ?(ser?. Transactions relating to collections by a single (ser from a large number of &estination Account .olders7 &ebit transactions should pertain to the &estination Bank Branches $hich fall under the 4urisdiction of the local Bankers% "learing .ouses 7 &ebit instructions from the (ser to the &estination Account .olders $ould be on magnetic tape>floppy 1 a form of electronic media that can be processed on computers 2 and $ould form the basis for the Sponsor Bank to credit the (ser%s account and the &estination Banks to debit the &estination Account .older%s Accounts7 #ndividual debit amount specified by the (ser7

Such other payment transactions involving a single total3credit to a (ser%s account $ith sponsor bank and multiple debits to a large number of beneficiaries at many bank branches 1"ollecting>&estination3banks2 to be specified by local C"" from time to time.

Introduction
This topic helps out in understanding the process of &ebt collection and monitoring. "ollections are also best kno$n as &elin-uency management. #t is associated $ith the recovery > delin-uency management of the credits > loans disbursed to the customers by the banks. The repayment record of borro$ers needs to be monitored continuously $ith regard to the payment of interest and repayment of principal. @henever a borro$er defaults or is likely to default, rigorous follo$3up has to be made for collection of the dues. The business of a bank managing risks and its effectiveness lies in an efficient recovery and exit strategy. The collections effort is very important in maintaining the -uality of the credit portfolio. Timely follo$ up is the key to success in collections. The chances of recovery diminish as time passes. .ence, intense follo$ up soon after default yields greater results.

2vervie= of Collections
The loan portfolio of a bank is to be monitored continuously to identify facilities $hich have exceeded and>or $here payment of interest >principal is late or long over due. The responsibility of collections department $ill start $hen an account becomes delin-uent until it is regularized by means of payment or closed after making full payment>charge3off. The collection process for a credit facility offered by a bank $ill be initiated $hen the account holder fails to meet one or more contractual payments 1installments2 on due date and thereby turn delin-uent or $hen the customer exceed the granted limit fixed for the overdraft facility by the bank. The ob4ective of collections department in a bank is to minimize outstanding delin-uent receivables and thereby reduce credit loss to the bank. The aim of the collections process is to obtain payments promptly $hile minimizing collections costs and $rite off cost. The collections department protects the assets of the bank by continuous monitoring of accounts, identifying early $arning signals of delin-uency to reduce financial losses. Identification ) Classification of Delin'uent Accounts* @hen a customer fails to pay the instalment amount or minimum payment due $ithin the payment due date, the account is termed delin-uent or in arrears. "ollections steps can be initiated on such an account in order to regularize the account and to protect the banks interest. Accounts that are in arrears or in delin-uent stage are classified as overdue so that the accounts in different stages of delin-uency can be managed more efficiently and strategies for recovery of overdue formulated appropriately. ,or intensive follo$ up overdue accounts are classified according to the period of default and each group is called a ;Bucket=. As the account moves from one month bucket to t$o months bucket, the account $ill be entrusted to another team. This $ould ensure focus and appropriate strategy to recover the dues. -1ample* "onsider a customer $ho has a 'oan facility $ith a Bank. The customer is expected to make an instalment payment of MNBBB>3 every month before the HBth of "alendar month. #nstalment amount MNBBB>3 "urrent month August6EBNB

+ayment &ue &ate 1+&&2 HN>B9>EBNB #f the customer does not pay the amount, on or before HNst August EBNB, the 'oan account is considered to be in arrears > delin-uent. The account could get levied $ith late payment charges depending on the policies existing in the bank. On Nst September EBNB, this account is considered N &+& 1one day past due2 and collections procedures are initiated for this account. On HBth September EBNB, if the customer has not made payment to the account, the account is HB days past due and considered as HB days delin-uent and in the HB &+& bucket. #f payment is not made to the account, the account $ill continue to age and there by move further up in the delin-uency categories 1IB &+&, AB &+&2. The collection strategies associated $ith each of these buckets $ill differ based on the procedures existing in the bank. The different collection buckets and the days past due are listed belo$ Days Past Due ;1 8 2< Days 3; 8 #< Days +; 8 =< Days >? <; Days Collection Bucket 8 3; DPD +; DPD 8 Comments Past Due Dou&tfu Bad De&ts 6on Performin) 0sset

Bank has to make provisions from their profits for Con +erforming assets and this reduces the overall profit earned by the banks.

#rocess Flo=

+onitoring of 2verlimit Accounts #n addition loans offered to the customers, banks also offer overdraft facility to the customer. 1The overdraft facility has been covered in detail in !etail loans and corporate modules2. A credit limit 1i.e. the maximum cap for the credit facility to be availed by the customer2 is assigned to the customer. The credit limit for a customer is arrived based on the credit $orthiness of the customer, security provided by the customer and the dra$ing po$er of the customer. The dra$ing po$er is arrived by calculating the current value of the security 1for example the stocks of the company2 of the customer. The customer can avail of the credit facility up to the limit available. @hen a customer exceeds the prescribed limit, then the customer is termed as ;over limit=. Over limit customer poses a financial risk to the bank. This type of over limit accounts also need to be monitored till the account gets regularized. The monitoring, regularization of overlimit accounts are the responsibility of the collections department.

Collection #rocess and "trategies The collection strategies prevalent in banks can be varied depending on the policies existing in the bank. The collection process consists of the follo$ing main activities A=areness Calling* A call $ill be initiated to the customer, $hen the first payment is due from the customer. This call is to make the customer a$are of the date of payment of his dues to the bank. Collection Calling* A call $ill be made to the customer, to make him a$are that he has missed the due date and re-uest him to pay the arrears at the earliest. Demand 8otice* #n the event of customer not responding to the telephonic calls, a $ritten communication is sent to the customer informing the status of the loan account. Field Collection* The activity involves meeting the customer in person to persuade the customer to repay the loan. A compromise deal may also be made $ith the customer, if it is found that the financial position of the customer has deteriorated as a result of $hich recovery of the entire dues may not be possible. Re:possession and disposal of hypothecated assets* As per the la$, the hypothecated assets or the collaterals provided by the customers $ould be taken into the possession of the bank, $hen the customer fails to make payment of arrears and settle the loan dues. Recovery through litigation* @hen the sale of asset1s2 does not yield enough to cover the outstanding balance in the loan account, bank $ill file a la$ suit for the recovery of balance dues. The follo$ing table gives flavour of the different strategies used by banks in contacting delin-uent customers and collecting payments from them. Collection Strategy / Actions 2etter' Statement messa)e

Days Past Due ;1 8 2< Days

3; 8 #< Days +; 8 =< Days <; 8 11< Days 12; 8 14< Days 1#; 8 1@< Days >? 1=; days

2etter' Statement messa)e' Phone ca s' Sus/ension of faci ity Reminder 2etter' Statement messa)e' Re/eated /hone ca s 2etter' Statement messa)e' Phone ca s' $isit to residence/ 5ffice 3and ed &y co ection a)encies' 2e)a notice 3and ed &y co ection a)encies' 2e)a notice' 9/date ne)ati1e ist 0ccount char)ed off' 3and ed &y reco1ery a)encies' 2e)a Proceedin)s.

Collection Agent* Once the account passes a certain level of delin-uency, the account is allocated to a collection agency to $ork on. The customer and the loan account details are given to the collection agency, $ho in turn $orks on these accounts on case to case basis. The accounts are at times allocated to agencies for initiating legal proceedings. The task of the collection agencies is to trace the defaulter and find out his exact financial position. Once the bank and collection agencies are convinced of the genuineness of the non3repayment case, they enter into negotiations $ith the customer. .o$ever, if the defaulter is hostile and does not agree to negotiations, banks hand over the case to their recovery cell. At this stage, the loan account is closed and banks usually $rite off the debt and take recourse to legal action. #n some cases, in case the defaulter absconds, police help is taken. The collector is given po$er to negotiate $ith the customer and can offer $aivers in case on one time settlement made by the customer. The agencies are paid either on a flat rate or percentage of the amount collected or combination of both. 3rite 2ff #olicy @hen an account is deemed not collectable, the account is charged off in the books of account of the bank. The amount $ritten3off is sho$n as a loss to the bank. Banks are re-uired to monitor cases $hich could get $ritten3off and provide for a provision for $rite3off. But the recovery procedures $ill continue from the banks end despite $rite3off. #n case money is recovered from the customer $ho has been $ritten3off in the banks book, it is treated as income in the books of account of the bank. Conclusion The collection function is increasingly difficult to manage properly due to the gro$ing size, complexity of the business and collection6s labor3intensive nature. Banks use the technology 1by implementing debt recovery > collection management soft$are2, current and historical information at its disposal to formulate a plan or strategy for optimizing its collection efforts. #n many banks, collection strategies rely on behavioral scoring models $hich predict the likelihood of collection. Armed $ith such information, bank managements effectively direct collection efforts $ith an emphasis on amount at risk.

Introduction
Banks constitute the payments systems. #n the absence of banks, all transactions have to be settled in cash $hich is not possible at all. #n addition to che-ues, there are many $ays through $hich payments are

effected. The traditional instruments, other than che-ues used for settling payments are pay orders and demand drafts. *radually, electronic funds transfers are replacing these instruments. !emittances of t$o types viz., #n$ard !emittance and Out$ard !emittance In=ard Remittance @hen a customer receives a remittance 1in the form of pay order > demand draft > /lectronic remittance2 from another customer, he approaches the bank for encashment. This is called as #n$ard remittance. 2ut=ard Remittance @hen a client $ishes to remit money to another and desires not to issue a che-ue for this remittance, he approaches the bank for providing a remittance facility. Such remittance may be in the form of a &emand &raft, +ay Order or electronic remittance. This is called out$ard remittance. This function is referred to as issue of &&, issue of +O, etc. as the bank issues remittance instrument. Foreign Remittances The in$ard>out$ard remittances may be in the form of foreign currency also like Traveler6s "he-ues 1T"2, ,oreign &&, ,oreign TT, etc. Costro, Qostro, and 'oro accounts are used for these purposes. S@#,T assists in efficient and fast transmission of funds bet$een t$o countries. These are explained in ;,orex operations>/xport>#mport ,inance=. #arties involved in remittances Applicant or remitter 8 $ho re-uest for transfer of funds or $ho remits the funds. Bank 8 Through $hom the funds are transferred or $ho issues the payment instruments Beneficiary 3 in $hose favor the instrument is dra$n, is called the beneficiary.

#ay 2rder .#2/ +ayment through "he-ues suffers from a deficiency $herein the che-ues could be returned unpaid by the dra$ee bank for many reasons including lack of funds. A pay order is a variant of che-ue, $here the payment is assured. This is also kno$n as ;banker6s che-ue=. Features of #ay 2rder +ay order is a che-ue issued by a bank on itself. The dra$er and dra$ee of a pay order is the same branch of the bank. i.e. the issuing branch and the dra$ee branch are the same. +ay order is issued by banks after collecting the amount from the applicant. The amount is kept in a separate account for making payment of the pay order $hen it is presented. +ayment of pay order cannot be stopped 1except the court order2 once it issued, as it is issued by the bank. #t is a source of interest free funds and commission income for the issuing bank as the amount is kept in a separate account till it is presented for payment.

Demand Draft A demand draft is ;an instrument in $riting dra$n by one branch upon another branch of the same bank. #t contains an unconditional order to pay on demand a specified sum to a specified person or to his order=. &emand drafts involve movement of funds from one place to another. &emand drafts are also che-ues issued by the banks on themselves but $ith the difference that the issuing branch and paying branch are different. &emand draft is a che-ue issued by one branch of a bank and made payable at another branch of the same bank. #t is used to settle transactions bet$een persons of t$o different places.

#arties to a Demand Draft ,ollo$ing are the important parties to a && Dra=er 3 One $ho dra$s the && i.e. the #ssuing Branch Dra=ee 3 One on $hom the && is dra$n i.e. the branch on $hich it is dra$n #ayee 3 One in $hose favour && is dra$n i.e. the beneficiary #urchaser 3 One on $hose behalf && is issued

3hy ) 3hen a DD is re'uired The probable reason for the customer to approach the bank for issue of && could be one of the follo$ing One client of the bank $ishes to remit money to another The client does not like to issue a "he-ue to settle this dues The other party is in a different city The other party does not maintain any account $ith the bank in the other "ity or even if he maintains, the client $ishes a &&

Issue ) #ayment of a DD Issue of Demand Draft

,ollo$ing are the various aspects associated $ith issue of && N. @hen the applicant re-uests for issue of &&, the bank verifies $hether they have their o$n branch at the place re-uested. #n some cases, even if a branch does not exist in that place, in case &ra$ing Arrangement 1i.e. tie3up $ith some other banks2 is available on any other bank in that place, && is issued. E. #f more than one branch is located in the place re-uested, the && is issued on the nominated branch. #nstead of nominated branches, some banks issue &&s on any branch as per customer6s preference. H. The applicant need not be a customer of the bank for taking a &&. F. && can be issued either against cash or against debit to any operative account of the applicant. .o$ever in case of issue of &&s against cash remittance, restrictions are imposed on the maximum amount for $hich && can be issued. .o$ever there is no restriction on maximum amount are for issue of &&s against debit to accounts. L. Some banks issue &&s 1single &&2 only up to a specified amount. This is mainly to avoid frauds. @hen a customer re-uests for issue of && for more than such stipulated amount, the amount is broken into number of units and multiple &&s are issued for each unit value. "ash payment can be made only after proper identification of the beneficiary. I. && issue attracts commission payable by the applicant. Such commission has a tier structure based on the amount of &&. D. The && is valid for a specific period 1say I months2 from the date of issue. The payee can encash the && or the purchaser can get the && cancelled $ithin this validity period. /lse, revalidation of && has to be done, $hich is discussed subse-uently. 9. /very && bears a number. This number may either be a check3digit method number or the printed serial number of the && itself. A. The && is printed, signed by authorized officials of the bank and given to the applicant. The printing may be in a 5agnetic #nk "haracter !ecognition 15#"!2 instrument or a Con35#"! instrument. But if the && is dra$n on a center $here 5#"! operations>clearing system is in force, printing in a 5#"! instrument is mandatory. NB. +articulars of name and address of the applicant, payee name, dra$ee branch, && number, && amount, commission collected, etc. are maintained at issuing branch as record. #ayment of Demand Draft The purchaser sends the && to the beneficiary. #f the beneficiary has an account $ith a branch of the same bank, he presents it to the branch. /lse, he presents it to his bank. .is bank becomes the collecting bank in this case and they present the && to dra$ee bank 1branch2 for payment. Such presentation happens through clearing house mechanism present in that place. The dra$ee bank verifies $hether the && is in order and is presented for payment before expiry of the validity period. #f validity has expired, it is called ;Stale &&= and can not be paid unless it is revalidated by the issuing branch. The dra$ee bank also verifies $hether any reported lost message has been received from issuing branch for the &&. #f so, the && is returned unpaid $ith suitable message. The applicant need not be a customer of the bank for taking payment of a &&. #f the && is in order, payment is made to the client. && can be paid and either cash is disbursed or credit is given to any operative account of the applicant. .o$ever in case of payment of &&s through cash, restrictions are imposed on the

maximum amount for $hich cash can be paid against &&. .o$ever such restrictions on maximum amount are not applicable for payment of &&s and credit to operative accounts. Duplicate #ay order , Demand Draft &uplicate +O > && may be issued if the original is lost or mutilated. A stamped indemnity 1an assurance from the customer that in case the bank is put to loss due to issuing the duplicate +O > &&, he $ill pay the bank the amount of loss2 $ill be obtained from the customer along $ith the re-uest letter for issuing &uplicate +O > &&. Bank may insist on guarantee from third party also incase the amount involved is too large. Bank $ill issue duplicate +O > &&, after ensuring that the original has not been paid. The original pay order $ill be marked as cancelled.

Cancellation of #ay order , Demand Draft +O > && can be cancelled at the re-uest of the purchase in $riting. Amount after cancellation $ill be credited to the purchaser6s account, if it is large. Bank $ill also take indemnity and guarantee from the purchaser $ho is re-uesting cancellation. Bank $ill also ensure from the dra$ee that the pay order > demand draft is not received > paid.

"top payment of #ay order , Demand Draft +ayment of +O > && cannot be stopped except by the court. Bank may refuse payment, if +O > && is tampered or altered.

Revalidation of a DD The && is valid for a specific period from the date of issue. The payee can encash the && or the purchaser can get the && cancelled $ithin this validity period. /lse, revalidation of && has to be done. !evalidation is nothing but validating the && for a further period, say H months. 5any banks have maximum period for such revalidation e.g. one year from the date of original expiry date, etc. !evalidation can be done either at the re-uest of the purchaser or payee. The fact of revalidation is done on the && itself. Such &&s can be paid before the extended validity period. !evalidation of && attracts service charges.

!oss of a DD #n case the && is lost by the purchaser either during transit or other$ise, the purchaser has to report loss of && to the issuing bank. Only the purchaser can report loss of && and that too at the issuing branch only. #ssuing Bank $ill immediately inform the dra$ee branch and send an ;/xercise caution $hile payment= for such &&s to the dra$ee branch. The dra$ee branch records such losses. After noting do$n loss of &&, in case the original && is received for payment, dra$ee branch returns the && $ith the remark that the && has been reported lost. Some branches charge service charges for the action taken on receiving information regarding loss of &&.

The purchaser has t$o choices in this case. .e can either get the && cancelled or get a duplicate &&. *enerally no accounting entries are passed in && account for report of loss of &&. Only collection of service charges $ill result in the entry mentioned under ;!evalidation of &&=.

Reconciliation By issuing a &&, bank undertakes a liability to pay the amount and as such it becomes a current liability to the bank. There are chances of the fraudulent alteration of the instrument especially the amount portion. .ence, banks have a reconciliation mechanism for &&s mainly for the follo$ing purposes. To ascertain the details of outstanding &&s To ensure that the material portion of issue of && and payment of && matches.

+articulars are collected from issuing branch and also the paying branch on a periodical basis and matching of the && entries are done one by one. #n case of mis3matches the issue is taken $ith the concerned branches. #n case banks have centralized banking applications and all the branches are connected to the data3center, automated reconciliation happens immediately during payment itself. -lectronic Funds Transfer /lectronic fund transfer enables the payees to get the funds instantaneously avoiding the transit time involved in sending the instrument by post or courier and also the time involved in the local clearing process. As cost of mailing and cost of handling are saved, /,T is cheaper than any other mode of remittance. /lectronic ,unds Transfer are of the follo$ing types o #ntra Branch o #nter Branch o #nter bank

Intra branch 8 Transfer of funds from one account to another in the same branch by debiting one account and crediting another account. Both the remitter and beneficiary are $ith the same branch of the bank. Inter branch 8 Transfer of funds from one account to another account in the different branch. Beneficiary and remitter maintain account $ith different branches of the bank Inter bank 8 @hen the beneficiary and remitter maintain account $ith different Banks, then an intermediary is re-uired to pass the funds and message electronically from one bank to another. "entral Bank plays the role of the intermediary in facilitating /,Ts. T$o facilities of inter3bank transfers are

S C/,T S !T*S 8-FT The process of electronic funds transfer is as follo$s !emitter o #nitial funds transfer through branch or internet banking

!emitter6s Bank o "entral processing centre of the bank extract details of the payment made from the bank systems o +ayment file is processed in central bank6s electronic funds transfer package. o The file $ill be encrypted and uploaded in central bank6s site "entral Bank o &o$nloads funds transfer files from the remitting bank o Sorts the data beneficiary bank $ise o (ploads the file to the beneficiary banks o This operation $ill be performed at regular intervals in a day 1viz., NB.HB am 7 NE.BB noon and F.BB pm2 to ensure the credit happens to the beneficiary account on the same day. o "entral bank debit the remitting bank6s account and credit the beneficiary6s bank account maintained $ith them. Beneficiary Bank o &o$nloads /,T file from central bank site o &ecrypts the file for processing the funds transfer to the beneficiary o "redits the beneficiary6s account

RT " !eal Time *ross Settlement 1!T*S2 Systems, has made the inter3bank funds transfer possible on a real time basis. #n C/,T, the funds are pooled at regular intervals and settlement is made, $hereas in !T*S, the funds transfer happens on real time basis. i.e. one transaction per transfer re-uest. To reduce the load > net$ork traffic on such funds transfers, a limit is fixed by the central bank, $hich ensures that the system $ill accept the funds transfer re-uest only, if the amount is higher than the stipulated limit.

Introduction to Cards
Advancement in telecommunications and computing technologies has caused revolutionary changes in business models. 5any businesses have been freed from the constraints of physical space, limited $orking hours and political boundaries. Technology has also impacted banking business in a big $ay. Banking has been freed from the constraint of physical branches. #t is no$ possible for customers to access the accounts and $ithdra$ cash any time any $here across the globe through AT5s, $hich are linked internationally through Q#SA and 5aster"ard net$orks. .o$ever, branches continue to be most important channel for sales and delivery of banking services and all other channels can at best support the branch channel. Types of Cards "ards are of different types as given belo$ AT5 "ards "redit "ards &ebit "ards +urchase "ards +rivate 'abel "ards Secured "redit "ard Smart "ards

AT+ Cards AT5s or Automated Teller 5achines, as the name indicates, are meant to provide the services that a teller at a branch provides on a EF hour basis. AT5s started out as cash $ithdra$al machine to serve the customers any time, any $here for the convenience of the customers. The bank also benefited as the cost of installing the AT5 $as much lo$er than that of a branch. *radually numbers of services are increased in the AT5. The card is protected and the customers has to provide +#C 1+ersonal #dentification Cumber2 $hich is validated before the transactions. Credit Cards "redit cards are basically lines of credit that once established, depending on the specific terms, allo$ an individual to spend up to a set amount of money, $hich is kno$n as limits and pay back these amounts either in +art or in full. This can be also called as ;+lastic 5oney=. "redit card terms differ on annual fees, percentage rates, payback terms and credit$orthiness restrictions. "ards can be issued $ith +rimary and Add on cards linked to the main card, $here the limit fixed is an overall limit. They have a validity period usually ranging from N3E years. "orporate "redit "ards are also issued to "ompany designated employees $here the charged amounts are debited to the company account. "redit cards are plastic cards $ith readable magnetic strips issued by a bank or a business, $hich allo$ the cardholder to purchase goods or services on credit. "ommon credit cards include Qisa, 5aster"ard, American /xpress and &iner6s "lub. 5ost of the Banks issue card that are affiliated to either Q#SA or 5AST/! because of its $ide acceptability. Through "redit "ards, besides purchase of goods and services, even cash $ithdra$al can be done upto a specified sub limit $ithin the overall card limit. "redit cards allo$ you to make purchases up to a specified limit and then en4oy a period of credit 3 usually up to the period varying from one month to LB days 3 before having to settle your bill. /very time you use a credit card, you are actually borro$ing money that is made available to you by a bank or other financial institution. Vou ho$ever have to repay a minimum amount each month, in $hich case interest is charged on the balance amount, usually at a high rate. .o$ever, if you pay the bill in full you incur no interest. This is like LB days interest free loan. @hy does any bank do thatK #f you borro$ !s.EB, BBB on personal loan at NN:. #nterest to be paid for LB days W !s. EB,BBB X NN: X 1LB>HIL2 W !s. HBN.FB. But, here the bank is giving you a loan $ithout interest $hen you use their credit card. &o you astonish something is $rong some$hereK. @ell, the concept is explained belo$ $ith a typical illustration N. @hen you use your card to pay for the camera $hich you bought from Sony @orld, Vou present your Bank credit card, say AB" bank credit card 1Q#SA card2 for the payment. E. Sony @orld s$ipes your card on a machine provided by "itibank. .ere "itibank is the ac-uirer bank H. "itibank communicates $ith the card issuer i.e. AB" Bank through Q#SA Cet$ork to check if the card is valid and has the re-uired credit limit. F. AB" Bank revie$s and approves > declines $hich is communicated back to Sony @orld. L. Vou sign a receipt > slip called Sales &raft given by "itibank. This is the obligation on your part to pay the money to AB" Bank. &ata on this receipt can be captured electronically and transmitted. I. At the end of day or at the end of some period Sony @orld submits the receipt signed by you to "itibank,

$hich in return pays Sony @orld the money. ,or the $hole process Sony @orld pays "itibank a fee called 5erchant &iscount. 'et us say this is I: of the sale value W I: X EB,BBB W !s. NEBB. D. "itibank sends the receipt electronically to a Qisa data center $hich in turn sends it to AB" Bank. 9. AB" Bank transfers the money to a settlement bank $hich in turn transfers the funds to "itibank. A. "itibank pays AB" Bank an #nterchange ,ee of F: of the sale value W F: X EB,BBB W !s. 9BB. NB. EB to LB days later Best Bank gets the money from you and you don6t need to pay the interest.

Sony @orld pays more than the interest that you should have paid for the loan that you take. As a cardholder, you have the follo$ing benefits N. "onvenience of not having to carry cash. E. "redit availability that too free of interest .o$ever $hat benefits does Sony @orld get for paying so much moneyK #sn6t it more profitable for them to take cashK They can save as much as !s.NEBB. @hen you don6t count the money that you are spending, you tend to buy moreY "ards encourage this activity $hich is called impulse purchase. #f you did not have access to credit, you $ould not have bought the camera this month or may be not any time soon either. By accepting cards, the merchant is actually extending you credit at the risk of the card issuer. .e pays money to the banks to carry that risk. Some banks provide cash back $hen you use "redit "ard of that bank...$hy is it so..K #f the sales draft that you sign at the retailer is also be from AB" Bank 1and not from "itibank2, they save on the #nterchange ,ee. A part of the 5erchant &iscount that they got may be passed on to you partially as "ash back. Also if you have noticed, AB" Bank gives you cash back only in the next credit cycle $hich $ill get reflected only in the next card statement. #t means they keep the cash back money $ith themselves for IB days before passing on a part to you. This accrues them interest too. And that also explains $hy banks has tie up $ith petrol pumps for example. AB" Bank has tied up $ith an oil marketing company $here you

could re3fuel your vehicle $ithout paying the fuel surcharge of E.L:. This is because the card issuer and the ac-uiring bank is the same and that saves interchange fees. Debit Cards &ebit cards are issued in con4unction $ith a business bank account, and are a substitute for che-ues. This is similar to AT5 card and additionally these cards can be used at any +oint of Sale 1+OS2 terminal. These cards are normally po$ered by Qisa or 5astercard. #t differs from &ebit card in one $ay by rather than allo$ing you a period of credit, payments are deducted almost immediately from your bank balance. As a result, spending is limited by your available funds and only signatories of a business account can use these cards. #urchasing Cards +urchasing cards are generally restricted to big businesses or public3sector bodies. #ssued by a range of banks and companies such as Barclaycard and American /xpress, they6re designed to cut do$n on paper$ork and the need for purchase orders. Charge Cards "harge cards also allo$ you a period of credit before you pay 3 but they must be paid off in full each month. Business banks tend to make charge cards as part of their offer to small businesses. They can be issued to as many key employees as you choose 3 some card issuers $ill allo$ you to set spending limits on employees6 cards. #rivate !abel Cards 5erchants can issue cards that can be used only in their retail chains>outlets .,or example Sears may release a card in association $ith any bank>net$ork that can be used only in sear6s outlets. The advantage for the merchant in releasing such a card is that the customer loyalty>re$ard $ith the merchant could be encouraged in the form of discounts and special offers. The cardholder can accumulate points based on the purchases made and these points can be later redeemed for gifts, services or discounts. Banks issues this type of products in association $ith large retail stores or airline companies. "ecured Credit Card Secured credit cards are credit cards targeted to customers $ith poor or limited credit histories $ho do not -ualify for a credit card. Secured credit cards are collateralized by cash deposits, generally a passbook savings account or certificate of deposit. &epending upon the bank6s policy, the credit limit is LB percent to NBB percent of the deposit amount. The bank may pay interest on the deposit account. These programs benefit consumers by helping them either establish or reestablish a satisfactory credit history. #f these customers perform satisfactorily, many banks $ill ;graduate= them to an unsecured credit card. "mart Card "ards that can electronically store a fixed value, $hich you have prepaid .As you make purchases, the value gets reduced by the amount of the purchase, and can be replenished. Smart "ards have a 9 bit micro processor embedded in the card $hich stores information about the cardholder, instead of the magnetic stripe Though costlier, smart cards offer better security than the conventional cards $ith magnetic stripe. Credit Card 0Concepts

Q#SA, 5aster"ard ) American /xpress are the three largest payment card systems in the $orld. Qisa accounts for half of the global purchases using cards follo$ed by 5aster"ard and American express. These associations are managed by board of directors composed of representatives on banks. These associations are responsible for &eveloping and implementing operating rules +rocessing transactions and interchange payments bet$een members. &eveloping system3$ide innovations such as interchange technologies. +romoting the association brand through advertising. "oordinating ,raud "ontrol initiatives Signing up card issuers, Ac-uirers and merchants

5ey #layers in Card Business S #ssuer> issuing bank The ,inancial #nstitution that extends credit to customers through bankcards. S "ardholder The customer $ho possesses the card and conducts financial transaction using it as cash substitute. S 5erchant Any business establishment is a ;merchant= once an ac-uiring bank authorizes them. S Ac-uirer> Ac-uiring processor The ac-uirer 1the merchant>retailer6s bank2 buys 1ac-uire2 the merchant6s sales slips 1ticket2 and credit the ticket6s value to the merchant6s account. S #nterchange Cet$orks 1Qisa ) 5aster"ard2 They provide services such as conducting authorizations, clearing and settlement processing of transactions, supervising the bankcard processing $ithin member banks and setting and enforcing bankcard rules and regulation Functions of Issuing , Ac'uiring Banks Function of an Issuing Bank #ssue card to -ualified customers !eceive transaction information from franchise> settlement house. +rovide transaction and outstanding balance information to card members Take credit and fraud risk on card members.

Function of an Ac'uiring Bank +rovide authorization. Accept transactions for credit to merchant accounts. Submit transaction information to franchise> settlement house +rovide statements and reconciliation to merchants. Take credit and fraud risk on merchants

Card "torage Information The details of $hat exactly the number in the credit card mean, and $hat type of information6s are stored in the magnetic stripe are given belo$.

The first digit in your credit3card number signifies the system H 3 travel>entertainment cards 1such as American /xpress and &iners "lub2 F 3 Qisa L 3 5aster"ard I 3 &iscover "ard

The structure of the card number varies by system. ,or example, American /xpress card numbers start $ith HD7 "arte Blanche and &iners "lub $ith H9. American -1press 3 &igits three and four are type and currency, digits five through NN are the account number and digits NE through NF are the card number $ithin the account and digit NL is a check digit. 6isa 3 &igits t$o through six are the bank number, digits seven through NE or seven through NL are the account number and digit NH or NI is a check digit. +asterCard 3 &igits t$o and three, t$o through four, t$o through five or t$o through six are the bank number 1depending on $hether digit t$o is a N, E, H or other2. The digits after the bank number up through digit NL are the account number, and digit NI is a check digit.

The "tripe The Stripe on the back of a credit card is a magnetic stripe, often called a magstripe. The magstripe is made up of tiny iron3based magnetic particles in a plastic3like film. /ach particle is really a tiny bar magnet about EB3millionths of an inch long.

The magstripe can be ?$ritten? because the tiny bar magnets can be magnetized in either a north or South +ole direction. A magstripe reader can understand the information on the three3track stripe. #f the AT5 isn%t accepting your card, your problem is probably either A dirty or scratched magstripe An erased magstripe 1The most common causes for erased magstripes are exposure to magnets, like the small ones used to hold notes and pictures on the refrigerator, and exposure to a store%s electronic article surveillance 1/AS2 tag demagnetizer.2

Information on the "tripe The card details are stored > encoded in magnetic strip as Track N,E and H. /ach track is about one3tenth of an inch $ide. Track N contains "ard holder Came , expiry date, etc Track E contains "ard number , expiry date, service code, "QQ , +QQ , etc Track three is a read>$rite track 1$hich includes an encrypted +#C, country code, currency units and amount authorized2, but its usage is not standardized among banks.

Credit Card !ife Cycle

The life cycle of card can be explained as belo$ N. "ardholder uses the card to buy a product > service from the merchant E. The transaction is captured and approved by the issuing bank H. Bank issues statement to the customer informing the amount to be paid and the payment due date F. There are three possible out comes L. "ardholder pays in full in $hich case there is no interest charged, or the cardholder pays in part in $hich case the interest is charged and levied to the customer during the next statement I. "ardholder disputes the transaction in $hich case the charge back process>fraud investigation process kicks off D. "ardholder does not pay in $hich case the collection process kicks off. #f the amount is not recoverable, the amount is $ritten off and the account is closed. #2" Terminal AuthoriDation +OS terminal transactions involve three steps Authorization "learing Settlement

AuthoriDation On presentation of the card, the merchant s$ipes the card through a card reader, $hich reads the data on the magnetic stripe and adds information that identifies the merchant and the value of the purchase. The /lectronic data capture 1/&"2 is the soft$are at the point3of3sale 1+OS2 terminal that dials a stored telephone number and calls an ac-uirer.

The Ac-uirer reads the message and determines the type of #nterchange Cet$orks 1Qisa, 5aster "ard2. #f the interchange net$ork is Qisa, then it dials the Qisa6s computer, $hich checks $ith the #ssuer6s computer to verify the credit balance to cover the purchase. #f it founds enough credit, the issuer6s computer $ill send back a message to the interchange net$ork 1Qisa, 5aster "ard2 authorizing the transaction. The interchange net$ork relays the message back to the terminal at the store as $ell as the ac-uirer. Clearing At the end of each business day, the merchant sends the sales transaction data $ith a re-uest for payment to his ac-uirer, $ho in turn sends it to the interchange net$ork 1Qisa, 5aster "ard2. The interchange computer passes the re-uest to issuer6s computer, $hich posts the transaction to the cardholder6s account. "ettlement The interchange net$ork consolidates all the transaction for the day and sends the transaction details to the ac-uirer and issuer. The issuer then sends the amount to the interchange net$ork, $hich then posts it to the ac-uirer6s account. Internet Credit Card AuthoriDation "onsumer goes $eb site, chooses goods and>or services, and fills out the merchant commerce application "onsumer enters credit card information into a secured form that is sent over the #nternet via !eal Time Online +rocessing soft$are 1i.e.Authorize.net2, $hich then sends the encrypted transaction to the ac-uiring processor for credit card authorization Ac-uiring processor sends transaction to card association, $hich in turn sends the re-uest for credit card authorization to the issuing bank #ssuing bank accepts or declines the credit card transaction and sends message to the card association The card association contacts the credit card processor $ith the credit card authorization, and then the re-uest to deliver goods and services is given to the merchant by $ay of the online credit card processing soft$are 5erchant sends the credit card processing company ?fulfillment notification to permit settlement? meaning that the goods and services have been delivered or are ready to be shipped The capture takes place $hen the credit card authorization information is given to the issuing bank and the consumer%s credit card is charged for goods and services re-uested>received XX This entire process takes place in less than ten seconds. ,inally, $hen the merchant decides to settle batch, the ac-uiring processor finalizes the credit card transaction $ith the issuing bank and they transfer money into the merchant%s bank.

Credit Card : Interest Calculation* Billing "ycle and Statement date Billing cycle is the one month period, the transactions done during the period are billed for the customer on the last day of the billing cycle. The statement is generated and sends to the customer at the end of the cycle and the print date is called statement date. Total Amount Due .TAD/ and +inimum Amount Due .+AD/ The total amount of billing during the billing cycle is the TA& 1plus balance carried from previous bill if any2. "ard issuing banks may insist only minimum amount say NB: of the TA& sub4ect to minimum amount of say !s NBB and this is called as 5A&.

#ayment Due Date ) Interest Free #eriod Cormally the payment due date is some EB or EE days after the statement date. The customer has to pay either TA& or 5A& on or before the due date. #f the customer pays TA& before the due date no interest is charged for the amount used on the purchases. Interest #ayment @hen a card holder does not pay the TA& on or before the due date, he becomes liable to pay interest. ,or instance, if the TA& is !s EBBB and the card holder pays only !s 9BB, on the balance !s NEBB, interest $ill be charged from the date of purchase. On the remaining balance the customer loses the benefit of interest free credit period. ,urther on all fresh purchases interest $ill be charged from the date of transaction itself. Con +ayment of the TA& is called ;!ollover= as the balance is tolled over from one billing cycle to another billing cycle. -1ample Billing "ycle Oct NI to Cov NL Statement &ate Cov NL +ayment &ue &ate &ec D +urchases during the billing cycle Oct EH !s NNBB Cov NN !s EHBB TA& !s HFBB 5A& 1L: of TA&2 !s NDB #nterest !ate H.IL: per 5onth +urchase after Billing "ycle Cov ND !s NILB &ec BH !s A9B "cenario $* On &ec L the customer pays !s HFBB, i.e. TA& Conse'uences Since customer has paid the TA& before the due date he $ill be eligible to get interest free credit period for the transactions after Cov NL. "cenario &* On &ec I the customer pays !s NDB, the 5A& Conse'uences On the remaining balances interest $ill be charged at H.IL: per month from the date of transactions. ,rom oct EH interest has to be paid on !s AHB 1NNBB less NDB2 till it is paid in full. ,rom Cov NN interest has to be paid on !s EHBB till it is paid in full.

On purchase after the billing cycle, interest has to be paid from the date of purchase ,rom Cov ND, interest has to be paid on !s NILB till it is paid in full ,rom &ec H, interest has to paid on !s A9B till it is paid in full

Default Con payment of even the 5A& is considered as default. #t sho$s the lack of ability or inclination of the card holder to honour his commitments. #n the event of default, Bank initiate recovery proceedings.

"orporate banking 1also called as @holesale Banking2 is the provision of services by banks to the like of large corporate clients, mid3sized companies, real estate developers and investors, international trade finance businesses, institutional customers 1such as pension funds and government entities>agencies2, and services offered to other banks or other financial institutions. #n essence, $holesale banking services usually involve high value transactions. @holesale banking contrasts $ith retail banking, $hich is the provision of banking services to individuals. The follo$ing topics are covered as part of "orporate Banking
,oreign /xchange 'imits ) "ollaterals 5oney 5arket +ayments Trade ,inance

Click on the above links to take the course Introduction


This module introduces the meaning of ,oreign /xchange and its importance in cross3border monetary transactions. #t also covers some basic concepts and terminologies used in ,oreign /xchange transactions.

3hat is Foreign -1change7


,oreign /xchange refers to changing money of one country for the money of another country. This is necessary since the money of one country is of no value>use at the other country 3 it cannot be used freely 8 and there is no single universal currency in $hich all settlements could be made. "onsider these scenarios N. An #ndian resident is touring (SA on business commitment 3 he needs (S &ollars for his tour7 he cannot use !upees in (SA. E. A British tourist decides to purchase an anti-ue in #ndia 3 he has to pay #ndian !upees for the purchase7 he cannot use 1Sterling or *reat Britain2 pounds. H. A *erman firm procures 1purchases>imports2 ready made *arments $hich an #ndian firm supplies 1Sells>/xports2 3 the #ndian firm has to be paid in #ndian !upees and not /(!O. F. An #ndian firm #mports Television 0it from a Rapanese firm 3 the Rapanese firm has to be paid in

Rapanese Ven and not #ndian !upees. Thus, the process of exchanging one currency to another is called ,oreign /xchange. 8eed for foreign e1change As enumerated in the above example, $henever there is involvement of t$o different countries in any kind of exchange, the value needs to be paid in the currency of the country eligible to receive funds. #n a nutshell, foreign exchange is re-uired for cross3border transaction>trade settlement. Foreign -1change +arket The foreign exchange market can be defined as a market in $hich individuals, business firms and banks buy and sell foreign currency. #t is a large, gro$ing and li-uid financial market that operates EF hours a day. #t is not a market in the traditional sense because there is no central trading location or ;exchange?. 5ost of the trading is conducted by telephone or through electronic trading net$orks. Authorized &ealers Cot all persons or entities can deal in foreign exchange7 it is governed by the regulations of the respective country and need permission>license to transact. Those Banks and #nstitutions $ho have been permitted to deal in ,oreign /xchange are called Authorized &ealers 1A&2. Almost as a rule, all the banks are authorized to entertain foreign exchange transaction. +oney changers Apart from A&, some firms or companies are also granted permissions to deal in foreign exchange. They cannot entertain the entire gamut of transactions but can undertake transaction involving purchase or sale of ,oreign "urrency and Travelers6 check only. These firms are kno$n as 5oney "hangers. Foreign Currency All currencies are denoted in H letter format standardized by #SO 1#nternational Standard Organization2. The first t$o letters denote the country and the last letter denotes the currency. /xception to this is /(!O, $here there is no country>currency combination letters, but the letters denoting the common union 8 /uropean (nion. The most commonly traded currencies are (S &ollars 1(S&2, *reat Britain +ounds 1*B+2, /uropean (nion "ommon "urrency 1/(!2, Rapanese Ven 1R+V2, "anadian &ollars 1"A&2 and Australian &ollars 1A(&2. Some other currencies are Singapore &ollars 1S*&2, Ce$ Tealand &ollars 1CT&2, #ndian !upee 1#C!2, Saudi Arabian !iyals 1SA!2, and (A/ &irhams 1A/&2. Currency pair An A& buys foreign currency at lo$er rates and sells at higher rates 1thereby earning profits2. 5eaning he al$ays has t$o rates for any currency pair 3 a buying rate and a selling rate. A currency pair is the -uotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. There are the t$o currencies that make up an exchange rate. @hen one is bought, the other is sold and vice versa. Base Currency and Counter Currency ,or any foreign exchange trading, currencies are -uoted in terms of a currency pair. The first currency in the pair is the base currency and the other currency is counter currency. ,or example, in a (S&>R+V currency pair, the (S dollar is the base currency and R+V is the counter currency. -1change Rate

Vou are $ell a$are that a kilogram of !ice does not cost the same as a kilogram of silver7 there is considerable difference in the cost or !ate. 'ike$ise, each currency has a procurement rate different than the other. The !ate at $hich a currency is converted into another currency is /xchange !ate. #n other $ords, the rate at $hich one currency can be exchanged for another is an exchange rate. ,or instance, each (S &ollar costs !s. FI.EDLB means the rate for (S& N is !s. FI.EDLB, and each *B+ costs (S& N.LAEL means the rate for *B+ N is e-ual to (S& N.LAEL. /xchange rates are generally -uoted to F decimal points and in some cases up to I decimal points. ,or instance, (S&>#C! exchange rate is FI.NFEF. Similarly, *B+>(S& exchange rate is N.LAELH. /xchange rates are -uoted #n t$o methods 8 direct and indirect ,or selling and buying transactions ,or different periods 8 spot and for$ard

Direct and Indirect methods $% Direct Rates (nder this system, the exchange rate for a foreign currency is expressed in terms of units of local currency e-ual to one unit of foreign currency. /xample (S& N.BB W !s.F9.LB $ould be a direct exchange rate for the (S& in #ndia &% Indirect Rates (nder this system, foreign exchange rate is -uoted as the foreign currency per unit of the domestic currency. #n an indirect -uote, the foreign currency is a variable amount and the domestic currency is fixed at one unit. /xample #C! N W (S& B.BEBIE $ould be the corresponding indirect -uotation in #ndia for the (S&. An exception to the above rule is R+V 1Rapanese Ven2, in $hich the rate is -uoted per NBB (nits instead of per unit. The system prevalent in #ndia until Aug NAAH $as to -uote exchange rates in the indirect method 8 all -uotations used to be in terms of foreign currency units e-ual to !s.N.BB. A s$itch $as made to the direct rate system and conse-uently all -uotations are no$ in terms of rupees e-ual to a unit of foreign currency. #urchase and "ale transactions $% #urchase Transaction #t is a transaction in $hich the A& buys foreign currency 1,"2 and pays 1sells2 in e-uivalent local currency 1'"27 it converts ," into '" -1ample* a. #n$ard remittance 8 (S& LBBB remitted from (SA converted to #ndian !upees 1purchased2 and credited to Savings Bank Account in #ndia. b. /xport bill paid 8 An #ndian firm receives (S& NBBBB from (SA $hich is converted to #ndian !upees 1purchased2 and credited to the "urrent Account of the firm in #ndia.

&% "ale Transaction #t is a transaction in $hich the A& sells foreign currency by taking 1purchasing2 a local currency. /xample a. Out$ard remittance 3 !s.NBBBB from a Savings Bank Account in #ndia converted to (S& 1sold2 and remitted to an Account in (SA. b. #mport bill paid 8 An #ndian firm imports machinery from (SA and pays !s.LBBBB $hich is converted to (S& 1sold2 and remitted to the exporter in (SA. One currency is bought 1procured>accepted2 and the other sold 1paid>given2. #n other $ords, there are al$ays t$o legs to one transaction 8 buying of one currency and selling another currency. The foreign exchange transactions result in increase>decrease of foreign currency holding and decrease>increase in local currency holding of the entities involved. Fore1 : Buying and "elling Rates As mentioned earlier, there are al$ays t$o legs for the same transaction 8 buying and selling. @hen one currency is bought, the other is sold. ,or commercial transactions 8 transactions undertaken $ith customers for settling commercial deals like #mports, exports etc. 8 rates are -uoted based on the nature of transaction. The follo$ing are the rates -uoted for B4FI8 $% Telegraphic Transfer .TT/ Buying Rate This is the rate at $hich a ,oreign #n$ard remittance received by Telegraphic Transfer is converted into !upees. /xample #f you are the beneficiary of a (S& remittance from (SA, Bank $ill apply this rate to convert the (S& amount and credit to your Savings Account in rupees. &% Bill Buying Rate This is the rate $hich is applicable to purchase an export bill. @hen a bill is purchased, the e-uivalent currency of the bill value is paid to the exporter immediately. .o$ever, the proceeds $ill be realized by the Bank after the bill is presented on the due date. /xample #f you have exported machinery to (SA and your counterparty has agreed to pay you after IB days, you have an option to approach your Bank in #ndia re-uesting them to purchase the bill > pay you the amount of bill immediately and claim it later from the counterparty6s Bank. The Bank $ill apply this rate to convert > purchase the (S& bill amount and pay you in !upees. There are detailed rules governing Zpurchase of export bills $hich $ill be discussed later. (% TravelersE Che'ue .TC/ Buying Rate This is the rate at $hich foreign currency Travelers6 che-ues deposited by the customer is converted into !upees. /xample #f you hold (S& Travelers "he-ue and approach a Bank to en3cash it. The Bank $ill apply this rate to convert the (S& T" amount, and pay you in rupees. 9% Currency .C8/ Buying Rate transactions

This is the rate at $hich foreign currency cash deposited by the customer is converted into !upees. /xample #f you hold (S& "urrency Cotes and approach a Bank to en3cash it, the Bank $ill apply this rate to convert (S& Cotes and pay you in !upees. The follo$ing are the rates -uoted for "-!!I8 $% Telegraphic Transfer .TT/ "elling Rate This is the rate applicable $hen a customer sends an out$ard remittance through Telegraphic Transfer for purposes other for imports. /xample #f you approach a Bank in #ndia to remit (S& to one of your relatives>friends in (SA, the Bank $ill apply this rate to convert your !upees to (S&, and send it to (SA. &% Bill "elling Rate This is the rate used for all transactions $hich involve handling of document by the Bank 1payment against import2. /xample #f you have imported machinery from (SA and approach a Bank in #ndia to pay your (SA counterpart in (S&, the Bank $ill apply this rate to convert your !upees to (S& and send to (SA. (% TravelersE Check .TC/ "elling Rate This is the rate applicable $hen a customer buys foreign currency Travelers6 checks from the Bank. /xample #f you approach a Bank in #ndia for obtaining travelers6 checks to be used during your travel to (SA, the bank $ill apply this rate to convert your rupees to issue you (S& T". 9% Currency .C8/ "elling Rate This is the rate applicable $hen a customer buys foreign currency notes from the bank. /xample #f you approach a Bank in #ndia for obtaining (S& currency notes to be used during your travel to (SA, the Bank $ill apply this rate to convert your !upees to issue you (S& "urrency Cotes 1"C2. Other rates $hich $ere -uoted before liberalization of #ndian economy 1NAAN2, but are no longer of much significance are &&>5T buying, "he-ue Buying and && Selling. "pot and For=ard Deals A ,orex transaction concludes either immediately or after sometime. This depends on the accrual 1actual receiving in this case2 of funds. ,or example, funds can be received immediately as in the case of receipt of remittance from abroad, or after sometime as in the case of realization of export proceeds, $hich generally takes place after the goods reach the buyer and he pays the money for the goods. #n both the cases, exchange rates can be agreed on the date of transaction itself. The deal 1transaction2 for $hich funds $ould be received immediately is called spot deal and for that to be received later is called for$ard deal. @hy are Authorized &ealers interested to entertain foreign exchange transactionsK As you $ould appreciate, any trade is done to earn profits. ,or example, a $holesale grain merchant buys rice from the farmers>middlemen at say, !s. HBB.BB per -uintal, and sells it to other retail traders at say, !s. transactions

HEL.BB. !etailer in turn $ill sell it to end users at say, !s.HFB.BB. 5eaning, $holesaler makes a profit of !s. EL and retailer earns a profit of !s.NL.BB in the transaction. .o$ever, not al$ays does the trader earn profit7 he could incur a loss as $ell, for instance, $hen there is a bumper crop and hence reduction of rate. Taking the above example, after having bought rice from farmers at !s.HBB.BB, the merchant also exposes himself to the risk of a loss, selling it to the other retail traders at !s.EAB.BB due to sudden spurt in supply of rice in the market. The same is applicable for buying>selling of foreign currency also. The A& buys (S& from the other A&>customers at say, !s. FI.BB and sells it to other customer at !s. FI.NB, earning a profit of B.NB paisa. .ere again, the A& is exposed to a loss also that in case, if the market fluctuates adversely and he is forced to sell (S& to other A&>customers at !s.FL.AB, he incurs a loss of B.NB paisa. #n a nutshell, foreign exchange transactions, $hile earning profit for the A& also exposes them to the risk of loss from the rate difference bet$een buying and selling. Foreign -1change : Deals and Trading ,oreign /xchange transactions bet$een entities are commonly called &eals and this process of dealing is called Trading. Any Trading has t$o aspects 8 purchase and sale. A trader has to purchase goods from his suppliers $hich he sells to his customers. 'ike$ise, the Bank purchases as $ell as sells its commodity 1foreign currency2. T$o points need be constantly kept in mind $hile talking for a foreign exchange transaction. N. The transaction is al$ays talked off from the Bank6s 1A&2 point of vie$. E. The item referred to is the foreign currency. @hen $e say a purchase, $e imply that 8 N. The bank has purchased. E. #t has purchased foreign currency. @hen $e say a sale, $e imply that 8 N. The bank has sold7 and E. #t has sold foreign currency. ,oreign exchange transactions can be in "urrency Cotes, Travelers "he-ues, realization of export proceeds 1in$ard remittance2, payment of imports 1out$ard remittance2, Bank &eposits etc. Bo= FG Trading takes place @hile A& enters into a transaction $ith his customer>client, he is $ell a$are $hether he is going to buy or sell foreign exchange to his customer. .o$ever, the same is not true $hile trading $ith other A& 8 also called counter3party. @hen the counter party asks for a rate 8 commonly termed -uote 3 he is not a$are if the counter3party $ants to buy or sell. .e $ould, ho$ever, be a$are of the amount of the transaction, since $hile asking for rate, the amount is specified. .e has to necessarily -uote t$o rates simultaneously 3 also called t$o3$ay -uote 3 the rate at $hich he is ready to buy and the rate at $hich he is ready to sell. This is as per international norms>practice. ,or instance, &eutsche Bank 1&B2 $ould typically ask ;Uuote (S&>#C! rate=. The rate -uoted by say, SB# $ould be, for instance, FI.NDHL>FB, meaning SB# is $illing to buy at FI.NDHL and sell at FI.NDFB. #f the rate

is agreeable, depending on $hether &B $ants to buy or sell, he $ould say G5ine6 1meaning (S& is mine 8 &B is taking>buying from SB#2, GVours6 1meaning (S& is yours 8 &B is giving>selling to SB#2, or GThanks6 1meaning ;thanks for the -uote7 not suitable and hence not interested either to buy or sell=2. 5ey #layers in Fore1 +arket The follo$ing are the key players in ,orex 5arket $% Central Bank* The country6s central Banks play a crucial role in controlling money supply, maintaining stability of the local currency by timely intervention in case of volatility in ,orex 5arket 1by supplying>sucking currency to>from the market2, regulating inflation, and also in handling *overnment related ,oreign exchange transactions. &% Commercial Banks .AD/* These engage both in the commercial transaction based ,orex transaction 1like #mports, /xports and remittances2 and in GTrading6. 1,orex Trading refers to the transactions entered bet$een A& $ithout any underlying "ommercial Transaction7 it is done more a speculation like share markets, but $ell defined and transparent2. (% Bedge funds* These investment vehicles, $hich are having considerable funds, impact the market by investing in ,orex 5arket as their strategy. These apart, others $ho are indirectly involved in ,orex &eals 1as commonly referred for the transactions2 are #nter3Bank Brokers 1$ho enable conclusion of transactions by finding counter3party2, "ommercial companies 1$ho have large exposure in foreign exchange o$ing to global business undertaken2, retail brokers 1$ho offer dealing platforms, analysis and strategic advice2 and #nvestors and speculators 1$ho speculate regarding market movement and invest suitably for earning profits2 "trong and 3eak Currency @hen the exchange rate of a currency pair moves up$ards, the base currency is said to become strong and the counter currency $eaker. #f (S&>#C! goes from FI.NBEL to FI.NBLB, (S& is said to become strong and the #C! $eak. "onversely, if on the other hand it moves to FI.NBNB, then #C! is strong and (S& is $eak. Determination of Currency #rices The predominant factor governing the exchange prices is the demand and supply. @hen the demand for currency is high, the rates for the currency $hich is sought goes up in relation to the counter currency, and the vice3versa occurs $hen the supply is more than demand. This apart, political stability, interest rates and inflation are other factors $hich govern the exchange rate. @here the local currency is hurt meaning the local currency becomes $eak, the "entral Bank intervenes by in4ecting ,orex into the market, and vice versa. +aAor Currencies The currencies $hich are in high demand globally and $idely traded in the global market are the 5a4or "urrencies. *enerally, the currencies belonging to *D "ountries are considered the 5a4or "urrencies. They include (S& 1(SM2, "A&, *B+ 1[2, /(! 1\2 and R+V 1]2. H#I#I As mentioned earlier, currency rates are generally -uoted to F decimals. The last decimal of a -uotation is a +#+. #f currency rate moves from N.NIDD to N.NIDI, the movement is one +#+. "pread and Commission

As mentioned earlier, the buying rate is al$ays less than selling rate. The difference bet$een buying and selling rate is the spread 1profit2. Apart from the exchange rate, banks load additional amount to the exchange rate offered to customer to$ards its cost7 this percentage is dependant on the nature of transaction, and is the commission of the A&. Fi1ed Rate #t is the exchange rate decided, and the rate at $hich deals are done, by the "entral Bank of the country transactions. Floating Rate This is the exchange rate determined by the market forces. This is based on the demand and supply of ,orex in the market, and varies $ith the change in demand and supply. BID and A"5 rate As mentioned earlier, the A& -uotes t$o3$ay rates 8 the rate at $hich it buys and sells. Buying rate is termed B#& rate and Selling rate is termed AS0 or Offered rate. /xample The 5id !ate fixed by a "entral Bank for (S&>#C! is FI.LB B#& 1Buying !ate2 -uoted by an A& for (S&>#C! is FI.FB $hich indicate that the A& is $illing to buy !upee against (S& ^ FI.FB, thereby earning a spread 1profit2 of B.NB. AS0 1Selling !ate2 -uoted by an A& for (S&>#C! is FI.IL $hich indicate that the A& is $illing to sell !upee against (S& ^ FI.IL, thereby earning a spread 1profit2 of B.NL. #n the example above, the difference bet$een buying and selling is the profit, popularly called spread. 6alue Date /very foreign exchange transaction involves exchanges of t$o currencies by the counterparties to the transaction. /xample 8 5r. O receives dollars in Ce$ Vork and pays out !upees in 5umbai. The counterparty 5r. V pays out dollars and receives !upees in the respective centers. The date on $hich the exchange of currencies is to take place is the Qalue &ate of the transaction. The currencies need to change hands at the same point of time but this is not possible because of the time differences in the t$o centers. .ence, the use of value dates. Since money in any currency has a time value, namely interest, the value date of a foreign exchange transaction $ill have to be a $orking day in both the centers $here the money transfers are to take place. FG Dealer +erson concluding ,orex transaction is called a dealer. .e takes position in one of the currencies, and enters into a counter deal $hen the spread 1profit rate2 is favorable, thereby earning profit. FG Broker They enable conclusion of deals by finding a matching counter deal, earning commission for the services.

HRolloverI of Contracts @hen the transactions are not concluded on the due date, and is instead postponed to a future date $ith mutual agreement of the parties involved, the contract is said to be G!olled Over6. The rollover happens for t$o business days, and involves payment of interest for the t$o day period. -1tension "ontracts $hich cannot be utilized on the due date, the contract may be extended7 the original contract is $ill be li-uidated and a ne$ contract is entered. The profit>loss arising out of the transaction is for the customers6 account. 8ostro Account Costro Account is the foreign currency account of an A& in the country of the currency. An #ndia based bank $ould have (S& Account in A5/O Ce$ Vork, *B+ Account in Barclays Bank (0, /(! Account in &B ,rankfurt, and R+V account in Bank of Rapan Tokyo. These accounts are called Costro Accounts. These accounts are used for settlement of ,orex transactions in the respective currency. 6ostro Account Account of a foreign Bank held in local currency is called Qostro Account. ,or example, "iti Bank Ce$ Vork holding a !upee Account $ith SB# in #ndia is called Qostro Account. The activities in these accounts are maintained in the Banks6 books7 these are called mirror accounts. The entries in the mirror accounts are matched $ith the counter entries in the Costro Account to ensure correctness of accounting7 this process is called reconciliation. Correspondent Bank This is the Bank $ith $hom business relationship exists7 it is not necessary that a bank maintains Costro account $ith the correspondent Bank. ,or example, an #ndian Bank holds Costro Account $ith "hase 5anhattan Bank, Ce$ Vork, but could route the transaction through Bank of "alifornia, San ,rancisco. #ayments,"ettlements Vou $ill agree that funds pertaining to the ,orex deals need be settled7 the foreign currency amount need be transferred to the beneficiary6s Costro Account and the local currency amount through the locally prevalent arrangement. @hile the local currency is settled by transferring funds from one account to other account maintained generally by the central bank or a bank designated by the central bank 8 funds are transferred from payer6s account to beneficiary6s account 8 through clearing or direct account to account transfer, foreign currency amounts are settled by transferring funds from one Costro account to another. #n both the cases, authorization is issued by the payer to his correspondent bank 8 central bank is the ;correspondent= in respect of local currency settlement 8 to transfer funds from their account to the beneficiary6s account. 'ocal currency settlement happens by issuing "he-ues, and foreign currency settlement happens by communicating instructions electronically. A fe$ years ago 8 prior to year EBBN 8 settlement instructions $ere transmitted through telex from #ndia. Since then, messaging system developed by S@#,T 8 Society of @orld$ide #nter3bank ,inancial Telecommunication 8 and agreed by banks globally are in vogue, since it affords secure, fast and cost effective means of transmitting settlement instructions. Banks $hich maintain Costro Account of various banks charge for maintenance of accounts, including for

the activities happening in the account. The charges are on per3transaction basis, and termed Costro Activity charges. To curtail payment of these charges, ,oreign /xchange "learing system is operational in #ndia and in fe$ other countries 1may be in different flavor2, $herein netting of both payment and receipt of foreign currency is done, and one instruction is transmitted for the net amount payable. ,or transaction of very huge volumes, a payment system called !T*S 8 !eal Time *ross Settlement 8 is prevalent. ,unds transferred through !T*S reach beneficiary $ithin couple of hours. This eliminates the re-uirement of $riting che-ues and the clearing process. This is especially helpful $hen payment is to be made beyond clearing hours. Dealing Room A &ealing !oom is a place $here foreign exchange deals are entered. #t occupies an important place in the organization as a profit centre. #t is staffed by specially trained personnel 8 popularly kno$n as ;&ealers= 3 $ho are specialized in executing foreign exchange deals. As you kno$, exchange rates are guided basically by the demand and supply factors. Because of this one sees fluctuations in exchange rates in foreign exchange markets. &ealers take advantage of such volatility in exchange rates and enter into trading positions 8 purely buying and selling 8 to maximize profits. Dealing Room 2perations 0 An overvie= &ealing room has three sections N. ,ront Office @here actual dealing operations take place. E. 5iddle Office @here 5#S, policies and !isk 5anagement aspects are dealt $ith H. Back Office @hich takes care of tracking settlements, !econciliation, accounting and reporting. @hen a deal is entered by the dealer, a deal slip is generated by him and passed on to the back office for obtaining confirmation of deal, settlement and accounting including arriving at the profit>loss position of the dealing room operations. 5iddle office ensures that all the policy guidelines are duly complied and proper 5#S reports are generated. Direct Deals @ith the advancement of technology, platforms $herein a forex transaction can be concluded electronically 8 on the rate display screen itself 8 are available. Qarious agencies like !euters and Bloomberg, $hich updates the global events and exchange rates on a continuous basis, offer the possibility of entering and concluding forex transaction on the screen itself. #t also enables printing of deal slips immediately on conclusion of deal. @herever deals are done over phone, facility to record the conversation is available, to ensure that disputes if any are immediately settled by replaying the recorded message.

Introduction
A typical Business scenario N. Vou propose to be in the business of trading in commodities. E. Vou $ant to engage in manufacturing and selling of spare parts>components re-uired for manufacturing TQ. H. Vou $ant to purchase or construct a house. F. Vou desire to o$n a brand ne$ car.

L. Vou have invested in CS" for tax saving purposes and in shares to earn better returns sometime back. .o$ever, you no$ re-uire funds for some family commitment. I. A construction company is given a contract to construct a bridge. #n all the above circumstances, the main ingredient re-uired to achieve the desired goal is finance. Vou $ill agree that availability of entire -uantum of finance re-uired for the targeted goal is extremely rare. To achieve the target, therefore, you $ould scout for source of funds. This is $here the banks pitch in7 they offer to finance you for an agreeable return 8 or interest and fees. !imits #n simple $ords, the amount up to $hich the bank agrees to lend is called the 'imit. #n other $ords, it is the maximum amount of credit that a financial institution $ill extend to a borro$er. Before proceeding further, let us get ac-uaint ourselves $ith a fe$ terms used in lending. Retail loans 'ending of money to individuals is !etail 'ending. 'oans like car loans, housing loans etc. are called retail loans Corporate !oans 'oans granted to business units or corporates for business purposes are called corporate loans. 'ines of "redit, Term 'oans etc. are corporate loans. Interest and +argin Any lending attracts interest and 5argin. The interest rate and margin percentage depends on the client including his past performance, conduct and value of the account and his standing in the business circle amongst others. 5argin is stipulated to ensure that the value of security is not eroded, and is sufficient to cover the outstanding liability. #eriod This is the maximum timeframe $ithin $hich the loan amount is expected to be li-uidated. Types of !imits 'imits can be classified on the basis of funds outflo$ as fund3based limit or non3fund based limit. Fund based limits ,und based limits involve outflo$ of funds, meaning the money is lent>physically parted by the banker. They can be generally of follo$ing types $% Cash Credits , 2verdrafts This is the primary method in $hich Banks lend money against the security of commodities and debt. #t runs like a current account except that the money that can be $ithdra$n over and above the amount deposited in the account, up to the extent agreed by the bank. #t is arrangement by $hich a banker allo$s his customer to borro$ money upto a certain amount 8 called limit. This is the most popular mode of borro$ing by large commercial and industrial establishments, on

account of the advantage that a customer need not borro$ entire money 1pro4ected as re-uired2 at once but can dra$ such amounts as and $hen re-uired. 'et us see ho$ a Bank arrives at the limit > amount of credit assistance for a "ash credit beneficiary $ith an example A commodity trader is engaged in business on a continuous basis. 5eaning, he needs finance on an ongoing basis. (nder such circumstances, ho$ do the banks go about granting financial assistanceK The trader pro4ects 3 Annual sale !s.IBBBBB 1+ro4ected2 +urchase value !s.F9BBBB 1assuming EB: profit margin2 Traders6 stake !s.NEBBBB 1EB:2 Shortfall !s.HIBBBB ,ortnight sale !s. ELBBB Assume that the past performance evidences his per fortnight sale. #n such an event, you can accept his pro4ected sale as achievable. .o$ever, it should be noted that the entire sale does not happen in one lot7 it happens in stages 8 once in a fortnight he sells goods $orth !s.ELBBB. #f he normally receives payment in about NL days from the date of sale, the total period his funds $ould be blocked $ould be one month, in $hich period, he $ould make total sale of !s. LB,BBB. Sales !s. LB,BBB +urchase !s. FB,BBB 1assuming EB: profit margin2 "ustomers6 stake !s. NB,BBB ,inancial Assistance !s. HB,BBB #n other $ords, he $ould re-uire !s.HBBBB>3 as bank finance at any given point of time for ensuring continuity of business. 2verdrafts 'oans granted against '#" policy, Cational Savings "ertificates, and Shares 1$here there is no availability of stocks2 is called Overdraft. &epending on the security, margin is stipulated in this case. -1ample* ,ace value of Cational Savings "ertificate !s.NBBBB 5argin stipulated EB: ,inance granted !s. 9BBB Similarly, margin of up to LB: could be stipulated against shares. This can also be a one3time loan or running account. &% Term !oans Banks lend money in this mode, $hen the repayment is sought to be made in fixed, pre3determined installments. This type of loan is normally given to the borro$ers for ac-uiring long term assets 1assets $hich $ill benefit the borro$er over a long period 8 exceeding at least one year2. +urchase of plant and machinery, constructing building for factory, setting up ne$ pro4ects fall in this category. Qehicles loans, loans for purchase of consumer durables, home loans also form a part of term loans.

Based on the period of repayment, Term 'oans are further classified into 8 a. Short term loans 1repayable $ithin E to H years2 b. 5edium term loans 1repayable $ithin L to D years2 c. 'ong term loans 1for tenor above D years2 'et us see ho$ a Bank arrives at the limit > amount of credit assistance for a term loan 1home loan2 beneficiary $ith an example #f you decide to purchase a flat, you re-uire finance to the extent of cost of flat. Vet again, you need to invest a portion of money from your o$n sources, and the bank $ill finance the rest. Total cost of the ready to occupy flat !s.ELBBBBB 5argin 1your stake2 !s. LBBBBB 1EB:2 Bank finance !s.EBBBBBB #f on the other hand, if the d$elling unit is under construction, the loan is Gdisbursed6 1released2 in stages as per the $ork progress. The above principle is also applied in various other types of loans 8 like "ar loans, loans to purchase consumer durables etc. (% Bill Discounting #n Bill discounting, Bank takes the bill dra$n by borro$er on his 1borro$er6s2 customer and pays him or her immediately deducting some amount as discount > commission. The Bank then presents the Bill to the borro$er6s customer on the due date of the Bill and collects the total amount. #f the bill payment is delayed, the borro$er or his customer pays pre3 determined interest to the Bank depending upon the terms of transaction. 'et us see ho$ a Bank arrives at the amount of bill discounting $ith an example An exporter has exported goods for (S& LB,BBB, the payment of $hich is due after IB days. The exporter maintains a fund based limit of (S& NBB,BBB 1$hich is arrived after thoroughly assessing his portfolio, value of security offered, collateral value and his credit$orthiness2 $ith his bank. .e is in need of funds > $ants to discount the bill and approaches his>her bank. Total Bill amount (S& LB,BBB #nterest charged by the Bank (S& E,BBB 1F:2 "ommission > "harges (S& LBB &iscounted Bill amount (S& FD,LBB The Bank assesses the bill against the purchase order and if all the terms and conditions of the export contract are complied $ith, the Bank decides to discount the bill. The Bank has discounts the bill > credits the party $ith (S& FD,LBB $ith interest > commission for IB days $orking out to be (S& E,BBB plus commission > charges (S& LBB. The Bank claims the bill value of (S& LB,BBB from the borro$er6s customer after IB days. 8on:fund based limits #n this type of credit facility, the banks funds are not lent to the customer but there is a commitment to part $ith funds in case of necessity. The Banker undertakes a risk to pay the amounts on happening of a contingency.

They can be of the follo$ing types among other 3 N. 'etter of "redit ,acility The Banker undertakes to pay on presentation of documents of title to goods. 1/xplained in detail under ;Trade ,inance=2 E. Bank *uarantee The Banker undertakes to discharge the liability of borro$er to third parties. 1/xplained in detail under ;Trade ,inance=2 2ther factors influencing limits 'imits are influenced by a variety of factors including your credit history and credit rating. @hile credit history sho$s payment and borro$ing pattern of the borro$er, credit rating sho$s a sub4ective assessment of the credit$orthiness based on the credit history and assets > liabilities of the borro$er. These factors are a part of the evaluation process used by Banks in setting limits. +onitoring of limits 'imits are carefully monitored to ensure that the designated amounts are not exceeded. Borro$ers $ith excellent credit rating and credit history are often re$arded $ith increase in limits. .aving a high credit limit but exceeding that limit is often vie$ed favorably among Banks. A borro$er $ho has the ability to utilize a large amount but opts not to do it is often seen as a responsible borro$er. "ecurity @hen a bank sanctions a loan, it has to secure its funds. #n other $ords, it has to protect the funds against default. N. #n case of limits against stocks, the stocks 8 also called inventory 3 are held as security. E. @hen the stock is converted into finished goods and sold, the receivables become security. H. @hen the loan is sanctioned against car or flat, the car or flat, against $hich loan is sanctioned is taken as security. F. @hen limit>loan is granted against permitted security, the instrument 1like CS", '#" policy, shares etc.2 are taken as security. L. #n case of construction contract, there is no physical security available. Cevertheless, finance is needed for payment to men and machinery amongst other things. The only security available is the receivables 8 either bills raised or to be raised 8 against $hich limits are sanctioned. The securities enumerated above are termed prime security. They are basically the securities available, against $hich the loan is sanctioned. #t is the main security. The terms used for obtaining security are +ledge 1of stocks2 .ypothecation 1of vehicle2 5ortgage 1of land and building2 *uarantee 1of the business o$ner2

Collateral "ecurity #n case of a default, the loan amount can be recovered by disposing of the underlying security. But the amount realized may not meet the outstanding loan amount or liability. #n other $ords loan may not be cleared by disposal of proceeds. To obligate such an event, further securities are taken. These securities are termed collateral securities. "ollaterals are properties or assets that are offered to secure a loan or other credit. "ollateral becomes sub4ect to seizure on default. /xample @hen a housing loan is sanctioned, apart from residential property, further securities in the form of CS" or '#" policies may be taken by the bank. 'ike$ise, in case of business loans, apart from inventory, further security like factory premises may be taken as collateral security. The collateral serves as protection for a lender against a borro$er%s default 3 that is, any borro$er failing to pay the principal and interest under the terms of a loan obligation. #f a borro$er does default on a loan 1due to insolvency or other event2, that borro$er forfeits 1gives up2 the property pledged as collateral 3 and the lender then becomes the o$ner of the collateral. "ecurity or Collateral +anagement Security or "ollateral 5anagement is the process of agreeing, confirming and advising collateral transactions. As enumerated earlier, $hen the banks lend money to the customers, sufficient security is taken to safeguard the finance. The bank regularly assesses value of assets to ensure that the value of assets covers their exposure. Vou $ill agree the value of plant and machinery, and other e-uipments, is reduced $ith usage. As against this, the value of the value land and building generally increases $ith passage of time. "tock "tatement The value of securities taken is sub4ect to fluctuation. #n the example of lending to trader, $hile the customer $ould have stocks $orth !s. EL,BBB on a particular day 1$hen he procures the same2, on a subse-uent date it could be Tero, since he $ould have sold the stock. (nder the circumstances, the bank has to ensure that there is no liability outstanding in the account. 5eaning the customer has to deposit the sale proceeds in the account. .o$ever, it is possible that the customer $ould not have received the payment since he $ould have afforded some time 1credit period2 to the buyer before making payment. And the customer $ould have raised an invoice for this amount. #n $hich case bank $ould finance against the bill 8 receivable 8 and clear the inventory finance. This procedure, ho$ever, cannot happen al$ays, considering that the business is a continuous process. A more feasible method is adopted by the banks 8 they advice the trader to submit their stock holding position 8 called stock statement 8 at regular intervals. The bank officials inspect the stock at periodic intervals to ensure that the statement submitted is correct. The paid value of stocks is the physical holding less the stock received on credit 1for $hich the customer has not paid2. As a prudent practice old, and hence possibly non3disposable stock value is also reduced 1it is unrealizable stock2.

Introduction
The money market is a component of the financial markets involved in short3term borro$ing and lending $ith original maturities of one year or shorter time frames. These transactions are concluded to either plug the gap in fund re-uirement or deployment of surplus funds. #t is better kno$n as a place for large institutions and government to manage their short3term cash needs. .o$ever, individual investors have access to the market through a variety of different securities. @hile $e have given a global Overvie$ on money markets in this module, for clarity in understanding the concepts, $e have focused on the #ndian scenario $herever re-uired. Cevertheless, the money market transactions are the same $ith locally applicable regulations. "onsider the follo$ing situations N. @hen a customer deposits funds in Bank, a portion of the amount has to be deposited by the Bank $ith !B# as cash to meet "!! and S'! re-uirement. To either tide over the shortfall, or to deploy surplus funds, banks trade in the money market instruments. E. "orporate entities are sometimes surplus of funds, $hich is probably not re-uired immediately. As you $ill agree, these funds are idle and hence does not yield any return. To earn some returns by $ay of interest, these idle funds are deployed in money market instruments. H. *overnment re-uires funds for their various initiatives. An example is development of infrastructure. To fund the initiative, they raise short term funds from the market by trading in money market instruments. As can be seen from the above instances, short term monetary transactions are entered through money market instruments. Features of +oney +arket 5oney 5arket instruments are issued and traded by *overnment, ,inancial #nstitutions and large corporations. These instruments are considered highly li-uid 1easily disposable2, extraordinarily safe, and very conservative, and hence yield lo$ returns. 5oney market investments are other$ise kno$n as cash investments because of their short maturities and easy li-uidity. Trading in 5oney markets are for huge volumes and only large corporations, *overnment and ,inancial #nstitutions, $ho have substantial amount of surplus funds, trade in money market instruments. #t $ould be interesting to note that the investments in money market is on their o$n account, and hence the investor themselves carry the risk. 1This is as against share market $herein a broker acts on behalf of his client and earns a commission for enabling the transaction2. The money market interest rates are deregulated7 they are determined by demand and supply. .o$ever, these rates generally $ould be linked to some benchmark rates 5oney market trading obligations take place in over3the3counter markets7 traders across different banks generally close their money market positions over phone or through brokers. 8eed for +oney +arket 5oney 5arket is a market place $hich enables the various players 8 *overnment, ,inancial #nstitutions and 'arge "orporations 8 to borro$ or lend short term funds to earn a return. #f the above facility not $ere to be available, these institutions $ould have not been able to deploy the funds and earn return for their idle funds. 'ike$ise, short term re-uirements could also not have been met. Thus, money market enables

management of short term funds. 5oney market operations are handled by treasury department of the organizations, $hich may either be integrated $ith ,orex operations, or $orking in unison. 2bAectives of +oney +arket N. #t provides an e-uilibrating mechanism for productively investing short3term surpluses and plugging short term deficits. E. #t provides a focal point for central bank intervention for influencing li-uidity in the economy 1as S'!, "!! ) !epo !ates are controlled by !B# in #ndia2 H. #t provides reasonable access to users of short3term money to meet their re-uirements at a realistic price. 5oney market instruments 5oney market securities are essentially +romissory Cotes issued by governments, financial institutions and large corporations. There are several different instruments in the money market, offering different returns and different risks. .ere are the ma4or ones 3 $% Call +oney , 8otice +oney "all 5oney or "all deposit is the money loaned $here the borro$er has to repay the funds $hen called on to do so by the lender. Cotice money refers to money loaned $here the lender has to give a certain number of days notice to the buyer to repay the funds7 the notice period is agreed at the time of contract. +articipants are permitted to lend > borro$ for tenors ranging from overnight to a maximum of NF days. &% Term +oney Term 5oney refers to those borro$ing > lending transactions bet$een the inter3bank participants $hich have tenor greater than NF days. (% Certificate of Deposits .CD/ A "ertificate of &eposit is a time or fixed deposit $ith a Bank. They bear a specific maturity date, a specified interest rate and can be issued in any denomination. They offer slightly higher return than Treasury Bills 1issued by the *overnment 8 see item A belo$2 because of the slightly higher default risk for a bank. The amount of interest that you earn depends on the current interest rate scenario, amount invested, period invested and the Bank. The main advantage of "& is their relative safety and the ability to kno$ your return ahead of time. On the other hand, the money is locked up for the specified period and there could be penalty for premature $ithdra$al. "&s are issued at discounted price 1i.e. interest rate is applied on discounted basis for the duration of the "& and discounted value is accepted as deposit and the agreed maturity value specified on the instrument $ill be paid on maturity to the holder. "&s are negotiable ) can be transferred by endorsement and delivery and hence are tradable in money markets like Over The "ounter /xchange of #ndia 1OT"/#2. 9% Commercial #aper "ommercial +aper 1"+2 is an unsecured short3term loan > instrument issued to finance short3term credit needs of large institutional buyers. #t is issued at a discount 8 lesser than mentioned on the instrument 3 reflecting current market interest rates. 5aturities on "+ are usually no longer than nine months, $ith maturities bet$een one and t$o months, average.

"+ is a very safe investment because the financial situation of a company can easily be predicted over a fe$ months. Only companies $ith high credit ratings and credit $orthiness issue "+ and subscribed by the investors. /ven "+s are negotiable ) can be transferred by endorsement and delivery and hence are tradable in money markets like Over The "ounter /xchange of #ndia 1OT"/#2. ;% BankersE Acceptance Bankers6 Acceptance 1BA2 is a short term credit investment created by a non3financial firm and guaranteed by a bank to make payment. They are traded at discounts from face value in the secondary market. #t is simply a bill of exchange dra$n by a person and accepted by a Bank. #t is a buyer6s promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral. The person dra$ing the bill must have a good credit rating other$ise the Banker6s Acceptance $ill not be tradable. ,or corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in goods and is highly useful $hen the credit $orthiness of the foreign trade party is unkno$n. One advantage of a BA is that it does not need to be held until maturity and can be sold in the secondary markets $here investors and institutions constantly trade BA. /xample 'et us assume the face value of a BA to be (S& NBBBB. "ommission for one year is H: p.a. Then, the amount received by the /xporter in one year is (S& ADBB. <% -uro Dollars /urodollars are (S dollar3denominated deposits at banks outside the (S. This market evolved in /urope and hence the name. /uro dollars can be held any$here outside the (S. This /uro dollar market is relatively free of regulation because of $hich Banks operate on narro$ margin than their counterparts in the (S. /uro dollars have maturity of less than six months. There is /uro dollar Time &eposit so also /uro dollar "ertificate of &eposit. /uro dollar "&s are less li-uid and offer higher yields. >% Inter Bank #articipation Certificates #nter Bank +articipation "ertificates 1#B+"2 are short term money market instruments to even out li-uidity $ithin the banking system. This is purely an inter bank instrument $hereby the banks can raise money and also deploy short3term surplus. The ob4ective is to provide some degree of flexibility in the credit portfolio of banks and for smooth consortium arrangements. #n the case of #B+", the borro$ing bank passes > sells on the loans and credit that it has in its book, for a temporary period, to the lending bank. ?% CollateraliDed Borro=ing and !ending 2bligations .CB!2/ "B'O is a money market instrument developed for the benefit of entities $ho have either been phased out from inter3bank call money market or have been given restricted participation in terms of ceiling on call borro$ing and lending transactions and $ho do not have access to the call money market. #t is basically a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety days.

@% Treasury Bills .T:Bills/ Treasury Bills are the most marketable money market security. Their popularity is mainly due to their simplicity. /ssentially T3Bills are a $ay for the government to raise money from the public. T3Bills are issued by the (S *overnment, #ndian government and governments of many other countries. They are short term securities that mature in one year or less from their issue date. T3Bills are considered to be the safest investments in the $orld because the governments back them. They are exempt from state and local taxes in many countries. They are issued $ith different maturities and purchased for a price that is less than the face value 1at a discount2. The holder gets the full par value on maturity. The return to the investor is the difference bet$een the purchase price of the security and $hat he gets at maturity. /xample #f 5r. O buys a N9B3days T3bill at (S& AIBB and holds it till maturity, he $ill earn (S& FBB on his investment considering the maturity value of the T3bill to be (S& NBBBB. $J% +unicipal bond A 5unicipal Bond is a bond issued by a city or other local government, or their agencies. +otential issuers of municipal bonds include cities, counties, redevelopment agencies, special3purpose districts, school districts, public utility districts, publicly o$ned airports and seaports, and any other governmental entity 1or group of governments2 belo$ the state level. $$% Federal Funds #n the (nited States, federal funds are overnight borro$ings by banks to maintain their bank reserves at the ,ederal !eserve. Banks keep reserves at ,ederal !eserve Banks to meet their reserve re-uirements and to clear financial transactions. These loans are usually made for one day only, that is, ?overnight?. The interest rate at $hich these deals are done is called the federal funds rate. These are much like S'! and "!! re-uirements of !B# in #ndia. $&% Repurchase Agreements .Repo/ Those $ho deal in government securities use !epo as a form of overnight borro$ing. #t is a form of short3 term borro$ing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the follo$ing day. They are short term loans 8 normally for less than t$o $eeks and fre-uently for one day 8 arranged by selling securities to an investor $ith an agreement to repurchase them at a fixed price on a fixed date. This short3term maturity and government backing means !epo provides lenders $ith extremely lo$ risk. !epo is popular because they can virtually eliminate credit problems. a% Reverse Repo 8 #t is the complete opposite of a !epo. #n this case, a dealer buys *3Securities from an investor and then sells them back at a later date for a higher price. b% Term Repo 8 #t is almost the same as a !epo except the term of the loan is greater than HB days. #articipants in +oney +arket +redominant participants in 5oney 5arket are $% overnment .Central,"tate/

The "entral and State *overnments issue short term instruments to finance their budget re-uirements, deficits and public sector development programs. /xample The #ndian *overnment is an issuer of *overnment Securities 1popularly kno$n as *3Sec.2 and Treasury Bills 1popularly kno$n as T3Bills2. The State *overnment issue securities termed as State &evelopment 'oans 1S&'2 to fund their budget deficit. &% #ublic "ector 4ndertakings +S( issue taxable and tax3free bonds to finance their $orking capital re-uirements and long term pro4ects. (% Banks Banks issues "ertificate of &eposits for period ranging from D days to N year. Banks also invest their surplus funds in +S( bond market and trade to take advantage of rate volatility. /xample Banks in #ndia participate in overnight 1call2 markets to manage their "ash !eserve !atio 1"!!2 commitments so also in *3Securities to maintain their Statutory 'i-uidity !atio 1S'!2. Cash Reserve Ratio .CRR/ Banks in #ndia are re-uired to hold a certain proportion of their deposits in the form of cash. .o$ever, actually Banks do not hold these as cash $ith themselves, but deposit such cash $ith !eserve Bank of #ndia 1!B#2 $hich is considered as e-uivalent to holding cash $ith themselves. This minimum ratio 1that is the part of the total deposits to be held as cash2 is stipulated by the !B# and is kno$n as the "!! or "ash !eserve !atio. /xample @hen a bank6s deposits increase by !s.NBB, and if the cash reserve ratio is I:, the banks $ill have to hold additional !s. I $ith !B#. Therefore, higher the ratio 1i.e. "!!2, the lo$er is the amount that banks $ill be able to use for lending and investment. This po$er of !B# to reduce the lend3able amount by increasing the "!! makes it an instrument in the hands of a central bank through $hich it can control the amount that banks lend. Thus, it is a tool used by !B# to control li-uidity in the banking system. "tatutory !i'uidity Ratio ."!R/ S'! stands for Statutory 'i-uidity !atio. This term is used by bankers in #ndia and indicates the minimum percentage of deposits that the bank has to maintain in form of -uickly realizable approved securities. Thus, $e can say that it is ratio of approved securities held vis3_3vis deposits accepted>held by the bank from the public. "urrently, the S'! is pegged at EL:. 5eaning for every #C! NBB.BB accepted as deposit, #C! EL.BB should be held in the form of -uickly realizable approved securities. This also enables regulating the credit gro$th in #ndia. #n a nut shell, out of #C! NBB.BB the bank accepts as deposits, #C! I.BB has to be held as "!! and #C! EL.BB should be held as S'!. #n effect, the banks $ould be able to lend #C! IA.BB to the borro$ers. 9% #rivate "ector Companies They issue "ommercial +apers 1"+2 and corporate debentures. "ompanies $ith cash surplus are active investors in instruments like ,ixed &eposits, "ertificates of &eposit and T3Bills.

;% #rovident Funds ) +utual Funds +, invest their short term and long term surplus funds in instruments according to their internal guidelines as to ho$ much they can invest in each instrument category. 5utual ,unds invest their funds in money market and debt instruments according to their approved investment pattern declared in each scheme. <% eneral ) !ife Insurance Companies

*#" have to maintain certain funds $hich have to be invested in approved investments like *3Sec and Bonds. They also participate as lenders in this market. '#" invest their funds in *3Sec, Bonds or short term money markets. >% 8on Banking Finance Companies CB,", as a mandate, invest their funds in debt instruments to fulfill certain regulatory re-uirements and also to park their surplus funds. Clearing and "ettlement "learing and settlement is the mechanism through $hich money market instruments are transferred and relative payments made. @henever a money market instrument is traded, some means must exist for transferring the instrument and for making payment. #n other $ords, there is a necessity for clearing and settling the trade, tasks that are usually referred to as operational or back3office functions. "learing refers to processing a trade and establishing $hat the parties to the trade o$e each other. Settlement refers to the transfer of value> instruments 1securities and currency2 bet$een the parties so the trade is completed. "teps involved in Clearing and "ettlement The first step is to convey details of the trade from traders to the back office. Second, the details must be compared and matched bet$een the buyer and seller to ensure that there is an agreement bet$een the buyer and seller regarding $hat is to be traded and the terms thereof. ,ailure to do so might lead to delivery problems. The participants in the money market are linked by clearing and settlement systems. 3here banks fit in At the center of the clearing and settlement mechanism for the money market are banks and the inter3bank payment system. Banks connect the participants in the money market by acting in three capacities. N. Banks act as agents for issuers of money market instruments7 they therefore perform the physical tasks of issuing and redeeming instruments in the market and of maintaining registration records. E. Banks act as custodians of instruments they render their services as safe3keepers of instruments to investors. The bank%s balance sheet does not sho$ like valuables kept in a safe3deposit box, or instruments entrusted to a custodian bank, as either assets or liabilities because they remain the property of their o$ners. H. ,inally, and most importantly, some banks specialize in clearing. The responsibility of clearing bank is transferring of securities from one party to another and for transferring payment

Introduction to #ayments

#n this module, $e look into various technology3dependant payment mechanisms $hich have been introduced, and are becoming popular by the day globally, in the banking system. #ayments +ayments are generally understood as transfer of funds from the payer to the payee. G#ayer6 is the party making the payment G#ayee6 is the party receiving the payment A payment that is initiated, processed and received electronically can be termed as an e3payment 1technology dependant payment2. "onventional payments are enabled through cash or check $hereas electronic payments are carried out by means of soft$are, payment cards and electronic cash. The ma4or components of e3payment system are money transfer applications, net$ork infrastructures, and rules ) procedures governing the use of the system. "ustomers and merchants are the ma4or actors of e3 payment systems. Technology dependant payments greatly increase efficiency by reducing transaction costs duly enabling trade in goods and services cheaper. They may also increase the convenience of making payments by enabling them to be made s$iftly and remotely from various devices connected to global net$orks. Check&$ The "heck "learing for the ENst "entury Act, commonly referred to as "heck EN, is a federal la$ 1of (S2 that enables banks to handle more checks electronically, $hich makes check processing faster and more efficient. #t is designed to replace the old process $hereby banks must physically move original paper checks from the bank $here the checks are deposited to the bank that pays them, transportation that can be inefficient and costly. "heck EN makes a ;substitute check= 1created using an image of the check2 the legal e-uivalent of the original paper check. (nder "heck EN, banks can electronically transmit check images rather than physically moving the original paper checks bet$een the receiving and paying banks. "heck EN applies to all types of checks consumer, business, travelers and (.S. Treasury. Reason for introduction of this system One of the many hard lessons learned from the tragic events of September NN, EBBN, $as the importance of developing and implementing improvements to ensure the safety and security of the (.S. payments system. @ith the country6s domestic air transportation system grounded for several days, a serious $eakness in the paper3based check processing system $as exposed, creating a potentially crippling set of circumstances. Since physical checks could not move, the system came to an abrupt halt, signifying the need for a rapid conversion to electronic processing. ,urther, processing costs of physical check are increasing, amounting to nearly t$ice that of electronic payments. A paper check is physically handled an average of EI times during processing, adding days to the total processing time. This also contributed to necessity for electronic processing. "heck EN $as designed to improve the overall efficiency of check payment processing. ,inancial institutions and their corporate customers are already realizing significant cost savings from float improvements, fraud detection and more efficient processing. #maging technology is decreasing dependency on postal and transportation systems. "heck EN is also shortening turnaround time, improving customer service and increasing collection rates on returned checks.

Benefits of Check&$ Operationally, financial institutions can reduce transportation costs, infrastructure costs, hard$are maintenance, supplies and labor resources, check storage expenses, and sorting time. Through remote deposit, commercial businesses can also reduce check processing time and expenses, make deposits $ithout leaving the office, and access funds -uicker than ever before. The Industry Benefits /liminates the risks associated $ith physically moving billions of checks. #mproves efficiency and ensures stability of the (.S. check payment system. ,acilitates, $ithout mandating, check truncation. !educes the overall cost of check processing. Streamlines the check collection and return processing. "apitalizes on existing technology. +romotes, encourages and enables image exchange.

The Financial Institution Benefits Accelerates settlements. !educes the volume of physical checks. !educes the number of times the physical check is handled. ,acilitates rapid discovery of fraud. Allo$s for earlier or multiple transmission. /liminates resubmits. 'o$ers clearing fees. !educes check float. #mproves collections. +romotes electronic processing of share draft returns. Accelerates receipt and processing of check collections returns. /nables potential increase in return check service fee income. !educes research and ad4ustments.

The Commercial Customer Benefits !educes the time it takes to process checks. &eposits can be made $ithout leaving the office. /liminates travel expenses and courier fees. &eposits can be made daily. 5any banks have extended deposit cutoff times. +rovides for faster access to funds.

2vervie= of Check&$ process As $ith all checks, the "heck EN clearing process starts $ith a person $riting an original check. The payee then deposits the check $ith the Bank of ,irst &eposit or BO,&, $hich $e $ill call Bank A. Bank A then stamps its endorsement onto the back of the original check. 'et%s assume that Bank A decides to ;truncate= the original check and send electronic information about the check to Bank B7 therefore, Bank A is the ;truncating bank.=

Of course, in order for this scenario to occur, Bank B must have previously agreed to accept checks electronically from Bank A. #n order to truncate the original check, Bank A captures an image of the front and back of the original check7 captures the magnetic ink character recognition 15#"!2 line data from the original check7 and sends the image and 5#"! line data in lieu of the original check to Bank B, its correspondent bank.

Bank B applies its endorsement electronically and transfers the check image and 5#"! line data to Bank ". Again, in order for this scenario to occur, Bank " must have previously agreed to accept checks electronically from Bank B. Bank " $ants to present the check for payment to Bank &, the paying bank. .o$ever, Bank & has not agreed to accept checks electronically. Accordingly, Bank " uses the information received from Bank B to create a substitute check, and therefore becomes the reconverting bank. ,inally, Bank " presents the substitute check to Bank & for payment. Bank &, the +aying Bank, uses the 5#"! line data on the substitute check to process it 4ust like an original check. Bank & may provide the substitute check to its customer, $ho $rote the original check, in the customer6s monthly periodic statement. !egal aspects The bank issuing substitute checks to the customers in lieu of the original instruments must provide a disclosure to that effect immediately. @hen a $rong debit is posted in the account, if the same is disputed by the customer $ith sufficient evidence, the dispute should be immediately redressed. +ending redressal, depending on the circumstances, the bank may need to re3credit the check amount disputed, sub4ect to a maximum amount ceiling, ,urther, if the claim is found to be false, the bank, immediately after recovering the amount 1$ithin EF hours2, should inform the customer about recovery. The main disadvantage of this system is the cost of hard$are re-uired for check scanning>truncation, but it is more than offset over a period of time by the cost saved in physical clearing process. -lectronic Funds Transfer 2vervie= The term /,T refers to the application of computer and telecommunication technology in making or processing payments. This is the term used for the payment system itself, rather than any specific product. /,T can be broadly classified into $holesale and consumer payments. @hile $holesale payments are sizeable in volume, and hence use $holesale /,T net$orks, consumer payments are small in value, but large in number. Direct #ayment This is another form of electronic banking $hich is generally concluded through the Automated "learing .ouses 1A".2 located at the "entral Bank or their branches. #n this system, credit>debit to>from the account is done directly $ith a one3time $ritten authorization. This eliminates use of AT5 cards

repeatedly. &irect credit is used predominantly for regular payments like salary and pension payment, and direct debit for preauthorized bill payments. #n #ndia, this system is popularly kno$n as /"S 1/lectronic "learing System2. -FT .-lectronic Funds Transfer/ This system is used to electronically move funds from one account to another in a different bank. The account at the other bank could be of the same person or may be third party. This system is used predominantly for values lo$er than the minimum amount specified for other types of payment systems. #n #ndia, the /,T $orks as under The remitter fills in the /,T Application form giving the particulars of the beneficiary 1city, bank, branch, beneficiary6s name, account type and account number2 and authorizes the branch to remit a specified amount to the beneficiary by raising a debit to the remitter6s account7 the instructions can be given online also if the bank provides online banking facility. The remitting branch prepares a schedule and sends the duplicate of the /,T application form to its Service branch for /,T data preparation. #f the branch is e-uipped $ith a computer system, data preparation can be done at the branch level in the specified format. The Service branch prepares the /,T data file by using a soft$are package supplied by !B# and transmits the same to the local !B# 1Cational "learing "ell2 to be included for the settlement. The !B# at the remitting centre consolidates the files received from all banks, sorts the transactions city3 $ise and prepares vouchers for debiting the remitting banks. "ity3$ise files are transmitted to the !B# offices at the respective destination centers. !B# at the destination centre receives the files from the originating centers, consolidates them and sorts them bank3$ise. Thereafter, bank3$ise remittance data files are transmitted to banks. Bank3$ise vouchers are prepared for crediting the receiving banks6 accounts the same day or next day. The receiving banks at the destination centers process the remittance files transmitted by !B# and for$ard credit reports to the destination branches for crediting the beneficiaries6 accounts. #t is pertinent to note that the transactions have a cut3off time7 transactions originating after cutoff time are processed the next $orking day. Bome Banking .2nline Banking/ This facility, made available by many banks, and enabled through internet, offers a host of facilities to the account holders. They include vie$ing account balances, transferring funds, re-uest for demand draft, make utility payments, etc. -lectronic Check Conversion This facility enables converting physical checks to electronic form. The necessity and usage is explained in detail under "heckEN. Advantages This /,T facility reduces processing cost and time, eliminates delay in payment and hence resultant penalty payment, and does a$ay $ith the cumbersome process and time of $riting>delivering the check.

Real Time

ross "ettlement .RT "/

An !T*S payment system enables processing and settlement of payment instructions bet$een banks individually and continuously throughout the day. This is in contrast to net settlement systems 1such as paper3based clearing houses and their more modern electronic e-uivalents2, $here payment instructions are processed 1?cleared?2 throughout the day but #nter3bank settlement 1i.e. the movement of the funds bet$een the banks2 takes place only after$ards, typically at the end of the day. #n other $ords, !T*S are funds transfer systems $here transfer of money takes place from one bank to another on a ?real time? and on ?gross? basis. Settlement in ?real time? means payment transaction is not sub4ected to any $aiting period. The transactions are settled as soon as they are processed. ?*ross settlement? means the transaction is settled on one to one basis $ithout bunching or netting $ith any other transaction. Once processed, payments are final and irrevocable. Benefits of RT " The attraction of the !T*S systems is that payee banks and their customers receive funds $ith certainty, during the day, enabling them to use the funds immediately $ithout exposing themselves to risk. The implementation of !T*S systems by "entral Banks throughout the $orld is driven by the goal to minimize risk in high3value electronic payment settlement systems. RT " in 4"A ,ederal !eserve @ire Cet$ork 1,ed$ire2 is the !eal Time *ross Settlement ,unds Transfer system operated by the ,ederal !eserve Banks in (SA. #n con4unction $ith the privately held "learing .ouse #nterbank +ayments System 1".#+S2, ,ed$ire is the primary (nited States net$ork for large3value or time3critical domestic and international payments, and it is designed to be highly robust and resilient. RT " in -urope TA!*/TE is the !eal Time *ross Settlement system for the /uro currency, and is offered by the /urosystem. The participants comprise of the /uropean "entral Bank and the Cational "entral Banks of those countries that have adopted the /uro currency. #t is used for the settlement of central bank operations, large3value /(!O interbank transfers as $ell as other /(!O payments, and provides real3time financial transfers and debt settlement at central banks $hich is immediate and irreversible. This ?electronic? payment system is normally maintained or controlled by the "entral Bank of a country. There is no physical exchange of money7 the "entral Bank makes ad4ustments in the electronic accounts of Bank A and Bank B. ,or example, if an !T*S transfer is initiated from a customer of Bank A favoring customer of Bank B for (S& NBB,BBB>3, the "entral Bank makes ad4ustments in the electronic accounts of Bank A and Bank B, reducing (S& NBB,BBB>3 in Bank A%s account and increasing in Bank B%s account by (S& NBB,BBB>3. The !T*S system is suited for lo$3volume, high3value transactions. #t lo$ers settlement risk, besides giving an accurate picture of an institution%s account at any point of time. Such systems are an alternative to systems of settling transactions at the end of the day 3 also kno$n as the net settlement system. #n the net settlement system, all the inter3institution transactions during the day are accumulated. At the end of the day, the accounts of the institutions are ad4usted. /xtending the illustration above, say another person

deposits a check dra$n on Bank B in Bank A for MLB,BBB>3. At the end of the day, Bank A $ill have to ?electronically? pay Bank B only MLB,BBB>3 1MNBB,BBB 3 MLB,BBB2. RT " in India The !eserve Bank of #ndia 1#ndia%s "entral Bank2 maintains !T*S payment net$ork in #ndia. !T*S is very similar to /,T process, except that the system is used for large value transaction 8 #C! N,BBB,BBB or more in #ndia 8 and the funds are settled in pre3defined time frame. Typically, the payment has to reach the beneficiary $ithin a maximum of t$o hours. Both the remitting and receiving must have "ore banking in place to enter into !T*S transactions. "ore Banking enabled banks and branches have assigned !T*S NN3character alphanumeric codes, $hich are re-uired for transactions along $ith recipient%s account number.

Introduction to Trade Finance


Trade denotes buying and selling, and ,inance in one $ord is ;money=. Trade ,inance is the method $hich buyers 1importers2 and sellers 1exporters2 of commodities and goods use to finance their businesses. #n other $ords, the money or funds necessary>involved for performing buying and selling of various commodities is called Trade ,inance. Trade can happen $ithin the confines of the country or across the border. The former is termed inland Trade and the latter ,oreign Trade or #nternational Trade. #nternational Trade happens also due to cost consideration7 if the cost of goods available locally is more than that available in the international market, trade transactions are entered to save costs. Any trade transaction can be broadly broken do$n into Movement of Goods Movement of Documents Movement of Funds Banks role in trade transactions Banks play a role in the ;5ovement of &ocuments= and ;5ovement of ,unds= after ;5ovement of *oods= has been done through a $hole range of logistics players. Vou $ould agree that trade can happen not only bet$een kno$n parties, but also $ith strangers7 the ultimate goal of any trade is to earn profit. ,or instance, a $holesale dealer in commodities sells it to a retailer 8 $hosoever it is 8 so long as he gets the money7 he $ould not attach importance to $ho the buyer is. So also, the retailer sells it to the consumer so long as he gets the money for goods. @hile the above is true for across the counter transactions, $hen the trade happens bet$een parties unkno$n to each other, both the parties involved $ould desire to kno$ the credentials of the other before entering into any transaction. @hile the seller is interested in ascertaining that the money for goods sold is realized, the buyer $ould be interested in ensuring that agreed -uality and -uantity of goods, for $hich payment is>$ould be made, is received. Banks involve in the trade transaction and enable receipt of goods by the buyer and money by the seller. I8C2T-R+" #n international trade, the buyer and seller enter into a contract for supply of goods by the seller at an agreed price, $hich includes all costs involved right from dispatch of goods from seller6s place to buyer6s

place 3 freight, insurance, duty etc. The #nternational "ommercial Terms 1#C"OT/!5S2 give a clear picture of the responsibilities of the seller3buyer in commonly used terms. #C"OT/!5S are recognized by most countries and $ere first published by #nternational "hamber of "ommerce 1#""2 in NAHI $ith subse-uent amendments. #"", for $hich most of the banks are members, $as formed to frame rules for international trade, applicable throughout the $orld. All the international trade transactions are governed by these rules framed by #"". There are NH different #C"OT/!5S grouped into F different categories. @e have restricted our study at this level to only BF of the active terms. $%-G3 .-1:=orks/ The obligation of the seller under this contract is to make the goods available at his premises > factory. The B(V/! has to bear the full cost and risk involved in bringing the goods from the seller6s premises to the desired destination. All costs, taxes etc. both at the seller6s country and the buyer6s country have to be borne by the B(V/!. &% F2B .Free on Board/ The seller6s obligation is to arrange to prepare the goods, pack them, place them on the vessel as per the terms of contract and obtain a bill of lading evidencing shipment. (% C)F .Cost ) Freight/ The seller has to prepare, pack, transport upto the port and arrange to place the goods on board a vessel and obtain bill of lading $ith freight paid. The buyer has to arrange to receive the goods at the destination. .e has to arrange for insurance of the goods during transportation. 9% CIF .Cost, Insurance ) Freight/ (nder this contract, the price -uoted by the seller includes cost of goods, freight charges upto named destination and insurance covering the voyage. The risk in the goods passes on to the buyer the moment they are placed on board a vessel in the seller6s country. "ertain variants of the above ma4or #C"O terms are less in vogue. Documents involved in trade finance transactions $%Bill of -1change or Draft A bill of exchange is an instruction by the exporter 1dra$er2 to the #mporter 1dra$ee2 or the importer6s bank to make payment of the amount mentioned in it. #t is a very important document for any financial transaction7 it is negotiable and can be produced in the court of la$ as evidence of, and for recovering, dues. A bill of exchange can be G"lean6 meaning not accompanied by any documents or G&ocumentary6 meaning accompanying $ith commercial documents. The tenor of the bill sho$s $hen it is due to be paid. #t is either 8 At sight 8 #t is payable $hen the exporter 1dra$ee2 sees it 1on demand2. Term or (sance 8 #t is payable at the end of a fixed period. This period is usually a specified number of days 1HB, IB, AB etc.2 after either sight or the date of the draft or the shipment date.

&%Commercial Invoice A commercial invoice is a statement containing full details of the goods shipped. #t contains 8 names and addresses of the seller and buyer, details of goods shipped 1-uality, -uantity, description and value2, packing details and packing marks, price and amount payable by the buyer, terms of trade 1,OB, ",! or "#,2, details of freight charges, insurance premium and other charges etc. (%"hipping Documents This document evidences transportation of goods. #t contains 8 name of the seller and buyer, transported from and to place, number of boxes > cartons > bags. +redominant modes of transport used 8 !R .!orry Receipt/ 8 This is a receipt of goods for carriage by !oad 1'orry2. RR .Rail=ay Receipt/ 8 This is a receipt of goods for carriage by !ail. B! .Bill of !ading/ 8 #t is a receipt given by the shipping company to the shipper for goods accepted for carriage by sea. The most important thing to note here is that 8 it also conveys title to the goods. A3B .Air=ay Bill/ 8 This is a receipt of goods from an airline company. As A@B is only a receipt, it is not a document of title. 5ultimodal 1"ombined2 Transport &ocument 8 This document lists the place of receipt, place of delivery and the different modes of transport involved. 9%Insurance Documents .#olicy , Certificate/ This provides actionable evidence of a contract of insurance and sho$s full details of risks covered. A marine insurance policy, for instance, provides cover against perils of the sea and other connected risks $hich the goods are exposed to. ;% Inspection Certificate "ertain buyers stipulate that the goods being shipped are inspected before shipment7 they could also specify agencies that should inspect the goods. These inspecting authorities issue certificate after inspecting the goods, duly recording their observations. Qarious internationally reputed #nspection agencies provide the #nspection services for a nominal charge, thus building in an element of comfort in the international transactions by assuring the importer > buyer that goods being shipped are as per the standards agreed upon bet$een the importer and the exporter. <% #acking list This document indicates the $ay goods are packed, meaning $hether in cartons, gunny bags etc. They also indicate the -uantity, measurement and $eights of goods contained in each pack. >% Certificate of 2rigin This document evidences the country in $hich the goods exported $ere manufactured or produced. &epending on the nature of goods involved in the trade, other documents, $hich could also be variants of the above, may be stipulated for submission.

+odes of International Trade There are BH ma4or recognized $ays of effecting payment in international trade Clean #ayments 1a2 Advance +ayment 1b2 Open Account Bills for collection 1a2 &ocs against +ayment 1b2 &ocs against Acceptance Documentary Credit .!etter of Credit/ 'et us assume that "ompany O from #ndia $ants to import machinery from "ompany V incorporated in (SA. @e shall see each of the $ays that "ompany O can pay "ompany V in this trade. $% Clean #ayments "lean +ayments are basically driven by trust. /ither the exporter sends the goods and trusts the importer to pay once the goods have been received or the #mporter trusts the exporter to send the goods after payment is effected. #n "lean +ayment, all documents are handled directly by the trading parties 1importer and exporter2. The role of banks is limited to only effecting payments. .a/ Advance payment The exporter may re-uire that the importer should make full payment in advance for the goods to be exported. This is possible $here the goods en4oy sellers6 market 1seller can dictate terms2. This mode of transaction is demanded by the exporter 1seller2 $hen the selling party is a $ell3kno$n and reputed company in its field. The exporter $ould dispatch the goods after he receives the full payment from the importer. Advance payments are usually adopted $hen the trading parties do not yet have a long term relationship. .ere the importer has to fully rely on the integrity of the exporter and his capacity to execute the order in time. The entire risk of the transaction is shouldered by the #mporter. /xample "ompany O 1importer2 remits money to "ompany V 1exporter2 and after receiving the full payment, "ompany V dispatches the goods to "ompany O. .b/ 2pen Account This situation is reverse of that for advance remittance. (nder this method, goods are dispatched to the buyer $ho takes delivery of them $ithout making payment. #t is agreed that he $ill make the payment to the seller at a predetermined future date 1HB, IB, AB days after shipment etc.2. Open Account as a method of settlement is possible $here the commodity commands buyer6s market. .ere the exporter bears the entire risk, loses control over the goods and relies on the integrity of the importer to receive payment. This type of a transaction symbolizes a long3term regular relationship bet$een the t$o parties. As long as the exporter can trust the importer to make his payments on time, an Open Account transaction is the simplest mode of doing long3term business. /xample "ompany V 1exporter2 dispatches the goods to "ompany O 1importer2 and after receiving the goods, "ompany O remits the money to "ompany V.

&% Bills for collection .Documentary Collection/ #n Bills sent for collection, the exporter does not part $ith the goods or the control over the goods till he receives payment and the #mporter does not pay until he gets the possession or control over the goods. The exporter dra$s a Bill of /xchange 1&raft2 on the importer for the good exported. *oods are dispatched to the importer6s country but the relative documents are sent through a bank for collection. The bank hands over the documents to the importer only on receiving from the latter the value of the goods as advised by the /xporter. T$o important points to be noted in &ocumentary "ollections 8 Banks involved do not give any guarantee of payment. "ollections are sub4ect to (niform !ules of "ollections 1(!"2 framed by #"". There are t$o types of &ocumentary "ollection transactions 1a2 &ocuments against +ayment 1&>+2 Also called "ash against &ocuments > "ash on &elivery, &>+ means payable at sight 1on demand2. The Bank at the importer6s end hands over the documents only $hen the importer has paid the bill. The attached instructions to the documents $ould read 8 ;!elease &ocuments against payment= The exporter, in this case, keeps control over the goods 1through the banks2 until the importer pays. /xample "ompany V 1exporter2 ships the goods to "ompany O 1importer2 and submits the shipping and financial documents to its bank 1+U! Bank2. +U! Bank sends the document $ith a covering letter 1instructions2 to "ompany O6s Bank 1R0' Bank2 detailing the release of documents to "ompany O on payment. As per the instructions of +U! Bank, R0' Bank releases the documents to "ompany O on paying the value of the bill. "ompany O takes delivery of the goods and R0' Bank sends the payment to +U! Bank to be credited to "ompany V. .b/ Documents against Acceptance .D,A/ #n &>A, the Bank at the importer6s end hands over the documents against acceptance of a draft 1to pay on a future date as per instructions2 by the importer. The future date is pre3defined 1HB, IB or AB days etc.2 .ere, the exporter allo$s credit to the importer7 the period of credit is called as ;(sance=. The importer is re-uired to make a signed promise to pay the bill at a set date in the future. The attached instructions to the documents $ould read 8 ;!elease &ocuments against Acceptance=. The exporter, in this case, loses control over the goods. /xample "ompany V 1exporter2 ships the goods to "ompany O 1importer2 and submits the shipping and financial documents to its bank 1+U! Bank2. +U! Bank sends the document $ith a covering letter 1instructions2 to "ompany O6s Bank 1R0' Bank2 detailing the release of documents to "ompany O on acceptance to pay after IB days. As per the instructions of +U! Bank, R0' Bank releases the documents to "ompany O on accepting the &raft to pay the value of the bill after IB days. "ompany O takes delivery of the goods and makes payment after IB days. R0' Bank sends the payment to +U! Bank to be credited to "ompany V. .ere, "ompany O may or may not pay after IB days and R0' Bank does not give any guarantee of payment.

(% Documentary Credit .!etter of Credit/ &ocumentary "redit is an instrument of settling trade payments. #f the seller 1exporter2 is not comfortable in sending the documents for collection, and instead desires to have some kind of assurance of payment 8 this scenario arises $hen buyer 1importer2 is ne$ 8 he re-uests the seller 1exporter2 to arrange for an undertaking from the bank to make payment $hen the documents are received. By this, he eliminates dependence on the buyer 1importer2 for realization of funds. The buyer 1importer2 in turn approaches his banker to give an undertaking to pay the bill amount. This undertaking issued by the bank on behalf of his customer to make payment on receipt of bills, or on a future date, is called 'etter of "redit 1'"2. A letter of "redit is an irrevocable undertaking issued by the banker on behalf of applicant 1buyer>importer2 favoring the beneficiary 1seller>exporter2 to pay a certain sum of money against presentation of documents stipulated, and in compliance $ith the terms and conditions stipulated therein. The decision to pay under a '" is based entirely on $hether the documents presented to the Bank appear on their face to be in accordance $ith the terms and conditions of the '". #t may be noted that banks deal only in documents and not in goods. .o$ever, by building suitable terms in the '", they ensure that the underlying shipment indeed takes place. .igh degree of involvement by banks in the '" process builds in trust into the transactions. T$o important points to be noted in &ocumentary "redit 8 #t is binding on the '" issuing Bank to pay the '" value to the exporter provided documents presented are in accordance $ith the terms and conditions specified in the '". &ocumentary "redits are sub4ect to (niform "ustoms and +ractices for &ocumentary "redits 1("+&"2 framed by #"". /xample "ompany O 1importer2 from #ndia enters into a contract $ith "ompany V 1exporter2 incorporated in (SA to buy machinery. "ompany O approaches his bank 1+U! Bank2 to issue an '" favouring "ompany V. +U! Bank issues an #mport '" and sends an 5T DBB S$ift message to R0' Bank 1(SA2 at exporter6s end. R0' Bank advises the '" to "ompany V. As per the terms and conditions mentioned in the '", "ompany V packs and ships the goods to #ndia. "ompany V submits documents to R0' Bank $hich in turn sends the documents to +U! Bank. Based on the documents presented being in accordance $ith the terms and conditions of the '", +U! Bank releases the document to "ompany O and makes payment to R0' Bank to be credited to "ompany V. .ere, it is binding on +U! Bank to make payment provided documents presented are in accordance $ith the terms and conditions specified in the '". Inter Bank communication : "3IFT The interbank communication bet$een banks>organizations is routed through S@#,T 1Society for @orld$ide #nter3Bank ,inancial Telecommunication2 net$ork, $hich is a co3operative society o$ned by its member financial institutions and head -uartered in Belgium. #t is a secure net$ork for transmitting messages bet$een financial institutions. The message formats are pre3defined and referred to by category numbers called 5T numbers. 5T DBB series deals $ith &ocumentary "redits and *uarantees 1#mports2, and 5T FBB series deals $ith &ocumentary "ollections 1/xports2. 1Other series are defined for other purposes2. The message formats

$hich are also associated $ith Trade ,inance are 5TNBH 1"ustomer Transfer2 and 5TEBE 1*eneral Bank Transfer27 they enable trade finance related payments. As mentioned above, individual message formats are available for specific re-uirement under each series. One cannot $rite S@#,T instructions that do not $ork $ith the preset messages and expect the sending bank to accept them, or the receiving bank to respond. #artial shipment *oods under '" can be shipped in full 1one lot2 or in installments or in parts 1multiple lots2. Shipment in multiple lots is termed +art3shipment. Transshipment @hen goods are shipped bet$een end destinations $ith intermittent stops involving unloading and reloading of goods, cargo is sent $ith Transshipment. Bank uarantees

Assume that "ompany O decides to purchase manufacturing e-uipment of considerable value, duly undertaking to make payment for e-uipment in NB half3yearly installments spread over a five year period. Vou $ill agree that the supplier of the e-uipment $ould not generally agree for that, unless somebody undertakes to make payment of installments in case "ompany O fails to pay. Assume that you have re-uested a contractor to construct your house. Assume further that the contractor demands advance payment of EL: of the cost of construction. "onsidering the value involved, you $ould not desire to part $ith such huge amount, unless somebody undertakes to make good the advance paid, if the contractor defaults from his obligation to construct your house. #n both the above instances, if somebody undertakes to make good the loss arising out of default, the supply>payment is made. And this somebody is generally a banker. *uarantee is an undertaking issued by the bank on behalf of its constituent, favoring the beneficiary, to pay the underlying amount if the terms of the contract or agreement are not honored #n the first instance, if the installment is not paid on due date, and in the second, if the contractor fails to construct the building to the extent of advance received, the bank $ould compensate for the financial loss. @hen the payment under the contract is defaulted, the beneficiary of the guarantee demands payment under the guarantee. This demand is referred to as invoking of *uarantee. Soon after the guarantee is invoked, the bank is expected to make payment of invoked amount. .ere again, for extending facility to establish a *uarantee, prior arrangement is set up bet$een the banker and the applicant. -1port Finance Pre-shipment and Post-shipment Finance Assume that an order is received to supply 1sell2 NBBB TQ Sets every month. +rocurement of such large number of TQ sets involves substantial cost, $hich the seller may not be able to invest fully from his sources. To enable seller procure and sell TQ sets, the banks lend certain percentage of total money re-uired by the seller. This is called pre3shipment finance or inventory finance 8 financial assistance extended before transportation or shipment for building up inventory. Again, some time $ould lapse before the cost of goods is received 1recovered2 from the buyer. Till such

time, the seller $ould be out of funds. This disables him from procure next set of TQ sets for $ant of funds. To ease the situation, the banks lend against the sale proceeds to be received. This is called post3shipment finance or receivable finance 8 financial assistance extended after transportation or shipment against the money to be received. As in any other kind of loan or advance, the above finance is also eligible for interest recovery. Types of #re:shipment Finance Based on the disbursement currency, +re3shipment finance can be classified into t$o $% #acking Credit .!ocal Currency/ : #C! This is the financial assistance extended for meeting the cost incurred before shipment. This financial help is in local currency and the interest chargeable is at rates applicable to local currency advance. &% #re:shipment Credit .Foreign Currency/ : #CFC This is the financial assistance for meeting the cost incurred but extended in ,oreign "urrency. The interest charged are governed by the interest rate applicable for the foreign currency 1'#BO!2 $hich is generally less than the local currency rates. Types of #ost:shipment Finance Based on the disbursement currency, +re3shipment finance can also be classified into t$o 'ocal currency advance +ost3shipment "redit in ,oreign "urrency

+ost3shipment finance depends on the type of bill and nature of Transaction. Purchasing a Bill (For Sight Bill Discounting a Bill (For !sance Bill "egotiating a Bill (For Bills under L# ,or extending either pre3shipment finance or post3shipment finance, prior arrangement is set up bet$een the banker and the seller. The arrangement amongst other things, specify the amount up to $hich the banker is $illing to lend, the percentage he is $illing to share 1business o$ner needs to have stake in the business, either already existing or stipulated7 bank $ould chip3in $ith the balance amount2, the period till $hich this arrangement $ould exist, and the interest and other charges payable for the services. !ondon Inter Bank 2ffered Rate .!IB2R/ '#BO! is the interest rate at $hich banks in 'ondon lend to each other. '#BO! is considered to be the most active interest rate in the $orld and even though it is a 'ondon3based interest rate, '#BO! is used in various markets around the $orld including in the (S. #n this case, it acts as a base rate to calculate interest rate to be charged on a ,oreign "urrency loan. /xample "ompany O 1exporter2 from #ndia enters into a contract $ith "ompany V 1importer2 incorporated in (SA to sell pharma goods costing (S& LBBBB in AB days. "ompany O approaches its bank 1+U! Bank2 to avail

+re3shipment "redit in ,oreign "urrency for AB days. 'et us assume (S& H 5onths '#BO! !ate to be F.BB :. +U! Bank calculates the interest rate to be charged on (S& LBBBB +"," for AB days $ith (S& H 5onths '#BO! as the Base !ate. The rate of interest charged by the Bank $ill be F.BB ` B.DL: W F.DL: B.DL: is the spread 1margin or profit2 that the Bank earns on this +"," loan. @hether the bank acts as a collecting agent or extends financial assistance, they are entitled for a fee 8 "ommission 8 and interest $here financial assistance is extended.

Banking, an industry kno$n $orld$ide for predictable business practices and measured evolution, is facing s$eeping and unprecedented change. "ustomers demand personal service $henever and $herever they $ant, D days a $eek, EF hours a day. @ith the competition 4ust a mouse click or a street corner a$ay, these challengesa\=compounded by mega mergers, decreasing margins, regulatory changes, and fierce competitiona\=present both obstacles and opportunities. Today, banks must adapt -uickly to survive. They must find ne$ value in existing systems and find $ays to explore ne$ market opportunities. Banks also must strive constantly to improve their service delivery and the -uality of their products and services. Today%s technology can help banks manage resources more efficiently, open lines of collaboration, and support adaptable, integrated systems. #n doing so, today%s technology can change customer, employee, and operations experiences for the better.

The follo$ing topics are covered as part of &elivery "hannels


#ntroduction Automated Teller 5achines 1AT52 +oint of Sale 1+OS2 0iosks Cet Banking 5obile Banking #nteractive Qoice !esponse "all "enter Other Banking "hannels

Click on the above links to take the course -volution of Delivery Channels
Traditional banking re-uires the physical presence of the customer at the branch or a retail outlet of a bank for most transactions. The retail outlet>branch is a brick and mortar structure re-uiring maintenance of infrastructure, branch net$orks and developing trained personnel thus leading to high costs of operations. @hile Banks tried to reach out the un3banked areas by opening more retail outlets, these outlets had a

higher cost per transaction because of the overhead costs involved. ,urther traditional banking branches also had other limitations $ith respect to the gro$ing demands of customers. ,or example, specific timings to transact business $hich made it difficult for customers on the move $ho did not have the time to visit a retail outlet for a transaction. These limitations and inconveniences of traditional banking forced a group of people to think for an alternate banking delivery channel option. The outcome $as the invention of an Automatic Teller 5achine 1AT52, the first alternate delivery channel being operational in NAIA. The main advantages of alternate banking delivery channels are !eduction in costs and increased convenience through remote payments Balance bet$een personalized services and emerging transactional services #mproved outreach especially in areas $here the traditional bricks and mortar approach is unfeasible thereby increasing financial inclusion and #ncreased product diversification by making savings and remittance products convenient, efficient and profitable.

Traditional banking gave $ay to Branchless banking, a distribution channel strategy used for delivering financial services $ithout relying on bank branches. @hile the strategy may complement an existing bank branch net$ork for giving customers a broader range of channels through $hich they can access financial services, branchless banking can also be used as a separate channel strategy that entirely forgoes bank branches.

-volution of Delivery Channels


The first modern day Automatic Teller 5achine 1AT52 $as introduced to consumers in NAIA by "hemical Bank, (S. This primitive AT5 supported only limited functionality but heralded an era of changes in Banking. Since then the AT5 has become a strategic necessity and the main item on the business agenda for the survival of a bank, instead of 4ust being a money dispensing>telling facility. The drastic changes in the information technology sector in the recent past further forced banks to move along $ith the latest technologies, lest they lose their customer base. Banks are in a race to embrace the latest technologies and provide the best of its services to its customers as customers are also becoming tech savy. #t is commendable to note that even smaller banks are also in the race $ith big Banks to establish their credentials in this area as they do not $ant to see the flight of customers to other banks for choice of best services. As mentioned earlier, changes in technology have made the banking services enter a ne$ era in banking i.e., reaching out to the customer and not the customer reaching out to the bank. /volution of other delivery channels like Cet Banking, 5obile banking, #nteractive Qoice !esponse System 1#Q!S2 > +hone Banking, "all "enter, etc has totally changed the Banking scenario $ith more and more services being provided by the banks. Banks are increasingly trying to shift customers to transact through automated channels for the simple reason of convenient and hassle free banking, cost cutting efforts as $ell as cross selling of bank6s other products. Associated Channels :Familiarising =ith some of the delivery channels Automatic Teller +achine #t is an electronic terminal enabling transactions on &ebit, "redit and pre3paid cards. These cards can be

either magnetic stripe cards or smart > chip based cards. All transactions done in an AT5 needs a +ersonal #dentification Cumber 1+#C2.

#oint of "ale .#2"/ +achines +oint of Sale 1also called as /lectronic &ata "apturing 8/&" machines2 is also an electronic machine installed at merchant outlets to enable transactions using debit or credit cards 1magnetic or smart cards2. A fe$ transactions need customer +#C for authentication of transaction. ,or example, 5aestro debit cards from 5aster"ard #nternational. Another term commonly used to describe +OS in Australia and Ce$ Tealand is /,T+OS i.e., /lectronic ,unds Transfer at +oint of Sale. This is the general term used for debit, credit and charge card payments and transacting at +OS

#hone Banking .I6R"/ +hone Banking or #nteractive Qoice !esponse System is an automated banking system that guides you through a series of options to perform the re-uired banking transactions. #t needs customer6s card details and +#C for performing the transaction. But no physical card presence is re-uired.

+obile Banking As the technology advanced, 5obile banking service has became the most $anted channel for Banks ) ,inancial #nstitutions to service their clients in a cost effective $ay by leveraging the advancements in mobile communication technology. #t is also kno$n as 53Banking, mbanking and S5S Banking.

8et Banking #t is true that, the convenience of banking comes $hen $e talk about Cet banking or banking at your finger tip. Online banking is not for to change your money habits. #nstead, it uses today%s computer technology to give you the option of bypassing the time3consuming, paper3based aspects of traditional banking in order to manage your finances more -uickly and efficiently.

5iosks .Touch points/ 0iosks or touch points are also electronic device>terminal like an AT5 $here customer can interact and do most of the banking financial and non3financial transaction except cash transactions.

/xcept AT5, +OS and 0iosk no other channels need physical interaction of customer card $ith devices. Or other$ise transactions in AT5, +OS and 0iosks are called as "ard +resented transactions $here #Q!S>+hone Banking > 5obile Banking > "all "enter are non3card presented transactions. 2ther Banking Channels Banking Agents A Banking Agent is retail or a postal outlet that processes clients6 transactions under contract $ith a Bank>,inancial institution or a mobile net$ork operator through +OS devices. The retail or postal outlet can conduct transactions like cash deposit, $ithdra$al, funds transfer, payment of bills, account balance en-uiry etc. Banking agents can be post offices, pharmacies, supermarkets, convenience stores, lottery outlets, etc. T6 Banking TQ Banking is a ne$ concept introduced recently in #ndia $hich aims at revolutionizing Banking by bringing it into the customer6s living room. "ustomers can access details and information regarding all banking services even if they do not have internet access through a Satellite &T. or &igital "able connection.

Architecture 2vervie= A typical integrated delivery channel architecture is sho$n belo$ $here all the channels are integrated to a centralized transaction s$itching system and interfaced to the host systems like "ore banking solutions, card management system, etc. .o$ever, the architecture depends on the individual bank6s needs and $ill have a different approach $hen each bank implements its delivery channel. Banks can go $ith single delivery channel like AT5 also $here this channel only need to be interfaced $ith .ost system>s. #f multiple channels are part of bank6s &elivery channel strategy, the belo$ diagram may find its place in Banks solution approach.

AT+:"=itch system An AT53S$itch application is a centralized system $hich controls the operations of the delivery channels connected to it and does a transaction validation and s$itching to the destination systems. The transaction from delivery channel hit the S$itching system and based on the business rules configured, it decides $hat to do $ith the transaction received. #t stores the customer card and transaction data. S$itch system can be interfaced to an external "ard 5anagement System or it can be a part of the S$itch system itself. S$itch system never stores the +#C of a customer in its database instead it stores the computed +in Qerification Qalue 1+QQ2. S$itch system architecture has an interface layer $hich accepts the transaction details from the channels, for$ard to its core layer for processing the transaction. ,or example, an AT5 cash $ithdra$al transaction has the follo$ing flo$ in s$itching application. 1!efer the above architecture2 N. "hannel #nterface layer 1inbound2 receives the transaction message from AT5 in T"+#+ message format, transform the message to S$itch internal message format and intimate the "ore layer. E. "ore layer or the business rule engine handles the transaction received as belo$ a.#dentify the #ssuer b.Qalidate the "ard c.Qalidate the +#C

d.Qalidate the limit #f found correct, intimate the .ost interface layer 1outbound2 to communicate to .ost system3say for example "ore Banking Solution. H. .ost #nterface layer 1outbound2 for$ard the message to .ost system and S$itch system $aits 1Timer starts here2 for reply from .ost and intimate core layer after receipt of message. F. "ore layer does necessary system updates, and intimate channel interface layer to communicate the AT5. L. "hannel #nterface layer 1#nbound2 transform the message and intimate the AT5 to dispense cash. I. AT5 completes the transaction and intimate S$itch application by $ay of return completion message. The above is an example of online transaction $here .ost system is available for communicating and responding. There could be some scenarios $hen .ost systems $ill be do$n due to net$ork issues, or other process like /nd3of3&ay operations, etc. #n such cases, S$itch system $ill perform a Stand #n +rocessing. ,or this, the latest balance of customer data or called as G+ositive Balance ,ile 1+B,26 is loaded to S$itch system at a scheduled time intervals. Based on this limit, S$itch system $ill send a respond message to AT5. This is called as an Goffline transaction6. These transactions are stored in a file called GStore And ,or$ard 1SA,26 file in S$itch system and $hen the .ost system become online, these transactions are routed to it for debiting the customer accounts. 0no$n AT53S$itch application is N. BaseEF>BaseEFeps from A"# @orld$ide, (S E. +ostillion from "eltron #nternational, (0 H. Oasis3#ST from ,idelity, (S F. Sparro$ from "!E systems, #reland.

Independent Channels
This section covers the independent delivery channels available and deployed by various banking organizations. 'et us start $ith the oldest delivery channel that is AT5.

Automated Teller +achine .AT+/


The Automatic Teller 5achine $as the first alternate banking channel to be introduced and is used $idely across the globe for both normal convenient banking operations and also for cross selling of other products of the Bank. A brief history .istory of an automatic teller machine goes like this. &on @etzel 1(S2 $as the co3patentee and chief conceptualist of the automatic teller machine, an idea he thought of $hile $aiting in line at a &allas bank. At the time 1NAI92 @etzel $as the Qice +resident of +roduct +lanning at &ocutel, the company that developed automatic baggage3handling e-uipment. The other t$o inventors listed on the patent $ere Tom Barnes, the chief mechanical engineer and *eorge "hastain, the electrical engineer. #t took million dollars to develop the AT5. The concept of the AT5 first began in NAI9, a $orking prototype came about in NAIA and &ocutel $as issued a patent in NADH. The first $orking AT5 $as installed in a Ce$ Vork based "hemical Bank. The first voucher based cash dispensing machine $as installed in NAID by Barclay%s Bank in 'ondon. /xperts, ho$ever, do not consider this an AT5. The first modern day AT5 $as introduced to consumers in NAIA by "hemical Bank, (S. The first #B53compatible &iebold machine is installed at a bank in #ndianapolis in NAD9.

Technical information* An AT5 is an electronic device > terminal having mechanical devices to do the re-uired actions on receiving instructions from source system. Cote that it is a dump terminal only having a +" core $ith different configurations like 9B *B .&&, @indo$sEk>Op, N *B S&!A5, net$ork card, graphic cards, etc and some other mechanical devices>part 1explained later sections2 to perform the functions. #t is being controlled>driven by its o$n operating system soft$are 1for example C&"`2 provided by the maker of the AT5s 1for example, Aptra soft$are for C"! AT5s2 $hich run on @indo$s. #t $aits for the instructions, act up on it and complete the instructions. #f couldn6t completed, intimate the source system, that is S$itch its failure. .o$ obedient it isY Ves, it $orks as a %slave% to the S$itch system. All AT5s are net$orked, either leased lines, QSAT 1Qery Small Aperture Terminal2 a satellite connections, or dial3up connections through routers to the centralised S$itch application and uses mostly T"+>#+ protocol for communication 1can be O.EL also2. #n past years, there $ere stand3alone AT5s $here it $as attached to that particular branch operations and controlled by local S$itch application. Types of AT+s* N. ,ront loading ,it to shopping mall, lobbies, etc $here cash is loaded by opening the currency chest from front side E. !ear loading (sed at Banks branches normally, $here cash is loaded from the back side of the AT5s. H. 5ulti3functional AT5s $ith cash > che-ue deposit modules F. 5ono3functional AT5s $ith out cash>che-ue deposit module 1cash dispenser only2 or called as sleek AT5s since small in size. L. 0iosks 3 #nformation 0iosks $here no cash deposit> no cash $ithdra$als functions are allo$ed. +anufacturers of AT+s N. C"! E. &ieBold H. @in"or F. ,u4itsu L. Triton, etc Bo= an AT+ =ork* An AT5 is simply a data terminal $ith t$o input and four output devices. 'ike any other data terminal, the AT5 has to connect to, and communicate through, a host processor. The host processor is analogous to an #nternet service provider 1#S+2 in that it is the gate$ay through $hich all the various AT5 net$orks become available to the cardholder 1the person $anting the cash2. 5ost host processors can support either leased3line or dial3up machines. 'eased3line machines connect directly to the host processor through a four3$ire, point3to3point, and dedicated telephone line. &ial3up AT5s connect to the host processor through a normal phone line using a modem and a dedicated telephone line. 'eased3line AT5s are preferred for very high3volume locations because of their thru3put capability and dial3up AT5s are preferred for retail merchant locations $here cost is a greater factor than thru3put. The initial cost for a dial3up machine is less than half that for a leased3line machine. The monthly operating costs for dial3up are only a fraction of the costs for leased3line. The host processor may be o$ned by a bank or financial institution, or it may be o$ned by an independent service provider. Bank3o$ned processors normally support only bank3o$ned machines, $hereas the independent processors support merchant3o$ned machines. #arts , Components of an AT+

'ike any other electronic device an AT5 is also driven by its electronic > mechanical devices $hen it is re-uested to do so. 'et us have a look at some of such components of an AT5, its terminologies and a little technical information also.

$% +onitor* ."creen , Touch screen/ AT5 screens have different types like crt>vga>svga>tft3touch screens size varies bet$een NB? to NL? screens. !ecently T,T Touch screens are $idely used in most of the AT5s. #ts function is for display functional menu, messages, advertisement screens, motion pictures, etc.

&% 2ption 5eys* These are the keys provided on the left>right side of the screens for selecting the choice of functions by the customer. These keys are called as %Option 0eys6 or termed as ;Optkeys=. (sed for selecting the re-uired functionality > menu in an AT5 by the customer. Technically each %Opt0ey% is represented by an alphabet 1eg. A, B, ", &2 in arriving at the option selected and the coding logic to be follo$ed for executing the function opted.

(% 5ey #ad .-ncrypted 5ey, #I8 #ads/ 0ey +ad contains alpha numeral keys for user inputs. After implementing the H&/S 1&ata /ncryption Standard2 security re-uirements, all the key pads are no$ encrypted $ith security net$ork keys. #ts function is for customer inputs. /ntering +#C, Amount, canceling operations, etc

9% Card Reader* "ard !eader reads the customer data from the "ard Track data for allo$ing the operation, flickers a glo$ing light $hen idle. There are H types of card readers, 5otorised card reader, &ip card reader and Smart card reader.

N. 5otorised card reader #t holds the card till the operation is completed. Once the operation is completed card $ill be e4ected. E. &ip "ard !eader "ard need to be s$iped once to read and store the information till the operation is over. Cormally in a dip card operation only one transaction is permitted due to transaction security reasons. H. Smart "ard !eader !eads the smart> chip card for accessing the data stored in the chip. Cote .ybrid card readers are being used for motorised and &ip card readers to read cards including smart cards. #ts function is for reading the card holder%s information from the card%s magnetic data area and pass information to S$itch for action. Technically, the card contain card holder%s information like Came, card number, expiry, cvv, etc stored in Track N and TrackE. The information stored starts $ith a ?7? 1semi3colon, called as %start sentinel%2 in Track N, thus making the card readable in card reader. N. #f the card data doesn%t start $ith ?7? card $on%t be read by system. ,or eg. Track N of card data may have like this, ?7bFLIANEHFBBBBB<<.?. #f the card has lost the data, card reader $on6t read the card. ;% Cash picker ) dispenser "ash from the cash cassette is picked based on the dispensing logic. #ts function is for picking the cash from cash cassettes and stacks the same before presenting it as a bunch, move the cash through a small conveyor belt to the presenter. Technically, cash is picked either using %,riction method% or by %Qaccum method%. (nder friction method currency is picked from top edge $here as vaccum method currency is sucked out. .ence if the currency is spoiled or not stiff, dispensing error or chances of getting additional currency may happen.

<% Cash #resenter &evice to present the stacked 1bunch2 cash to the customer. #ts function is for presenting the cash to the customer $ith in the time specified 1normally NL3HB seconds2. #f cash is not taken out or presented $ith in the time, cash $ill be retracted and the same for diverting to &ivert Bin.

>% Divert Bin &ivert bin contains the currencies diverted during presentation timed out, or due to some other technical errors. #ts function is nothing except to hold the diverted currencies for cash tallying purpose. Some times this divert bin may become full, if some technical issues are there $hile cash dispensing. #n such cases, AT5 $on6t function and go out of service.

?% Deposit +odule* 5ostly seen in multi3functional AT5s $here cash > che-ue deposit can be done. /nvelopes are to be used to drop the che-ue or cash $hile depositing along $ith challans $ith Account Cumber. #ts function is for accepting deposit 1cash>che-ue2 from the customer $hen opted for %&eposit%. Technically, $hen customer opted for %&eposit%, AT5s instructs the &eposit module slit to open, customer need to put the cover containing cash>che-ue. AT5 3 deposit module $ill print the

transaction details on top of the cover to identify the Transaction details, $hile inserting. 1That is card number, date, etc2. @% Cournal,Cournal printer* Rournal contains all the successful>failed transaction details stored. #t is an electronic 4ournal $here all transactions happened in AT5 is stored. #t simultaneously prints the transaction details on a paper roll also. Rournal printer is inside the AT5 can be either dot matrix or thermal printer. Thermal printout need special type paper rolls also. #ts function is to print the events > transactions happening $hile customer operates the AT5 in a specific message format. #t contains the transaction data and is as e-ual as the cash scroll>4ournal of a Branch since the cash paid details are stored in AT5 Rournal. This details are stored in the +" "ore of the AT5s and can be retrieved 1called as 4ournal pulling2 for reconciliation of transaction data $ith other systems. Cormally such data are stored for a maximum period of one month in AT5s. Thereafter the records $ill be over$ritten. .o$ever, all these transactions $ill be available in the AT53S$itch application also.

$J% Receipt #rinters Small size dot matrix >thermal printer, printing size configurable. !eceipts prints normal size of HI chars #ts function is to prints receipts > statements, etc.

$$% Currency Chest* "urrency "hest contains the currency cassettes stored in slots inside the AT5. #ts function is to safe custody of cash, through secured locking.

$&% Currency Cassettes* "urrency cassettes can be a minimum of E or L depends on the bank%s re-uirement loaded $ith cash $ith different denominations currencies. /ach cassette is marked for the "urrency to be placed in the cassette. /.g. !s.NBBB>W or !s.LBB>3 , !s.NBB>3 #ts function is to contain currencies sorted and stacked>arranged in order for disbursement>tallying. "urrencies are placed so tightly stacked that $hen disbursement happens, remaining currencies moved automatically so that cash picker picks the next currency. Technically, each cassette is configured 1using hexa decimal value method2 to keep only one type of currency only. #f some other currency is kept in the cassette meant for one currency, there $ill be a mismatch of disbursement and either excess or short dispense may happen. /ach AT5 vendors need to be (' EAN certified for the "urrency "hest 1that is tamper >fire proof, etc2 $ith out $hich AT5 cannot be deployed.

$(% Deposit bo1* #t is a drop box inside AT5 $here cover containing cash>che-ue is directly dropped in to. #ts function is to store the "ash > "he-ues deposited in AT5 till operation team picks it up for accounting.

$9% #C:Core .Computer system/* +" "ore is the core computer system inside the AT5, available $ith the latest configurations.

#ts function is to drive the AT5 using the AT5 controlling soft$are loaded, for example Aptra8 C"!, and net$orked to external systems for action. The screen 4pegs, motion pictures, executable images, etc are stored in +"3"ore respective directory path. @hen AT5 boots up, these images are loaded to +" "ore memory for operations. Technically, it drives the AT5s using the controlling soft$are.

$;% Bidden Camera Some of the AT5s are fitted $ith hidden camera 1for example @incor AT52 next to the 0ey +ad. #ts function, there is no need to explain. "apture all your actions $hile you are at the AT5 location.

$<% "ecurity !ock* Security locks for the "urrency "hest. This can be electronic or manual or can be both. #ts function is to lock the currency chest, either N2 Cormal manual lever method and lock Or E2 /lectronic key using +ass$ord, &igital numbers.

Functionalities supported AT5 supports the follo$ing functionalities

Cash 3ithdra=al o Fast #ash$ @here pre3defined amount can be selected and $ithdra$n $ith out much key selections involved. o "ormal #ash$ @here customer needs to enter the re-uired amount. o #ash %ithdra%al can be done from savings > checking or current > credit card accounts #I8 change* +#C change $ith in issuing bank. +#C change of another bank card also can be done in another bank AT5, if there is a net$ork tie3up arrangement exists. Balance In'uiry from savings > checking or current account. Deposits o "ash deposit o "he-ue deposit +ini "tatements $here last five or ten transactions are printed Fund Transfer o From &%n accounts 8 Savings to "hecking , vice versa o 'o third part( ) designated accounts $here transfer is permitted through net$ork tie3up arrangements. Check Truncation $here che-ue image is captured electronically in an AT5 and the image details are sent for clearing. 6alue Added "ervices o 5obile Top up o (tility Bill payments like 8 /lectricity, Telephone, etc "tatement #rinting 1if supported2

Transaction Flo= A typical Balance en-uiry transaction flo$ from savings account 1&ip card AT52 is described belo$ N. "ustomer inserts card E. AT5 reads the card and re-uests +#C

H. "ustomer enters +#C F. S$itch system verifies +#C L. AT5 displays menu options I. "ustomer selects Balance #n-uiry option from Savings D. S$itch system send the transaction details to .ost System 1example "ore Banking Solution2 9. .ost system responds $ith reply A. S$itch system intimates AT5 NB. AT5 displays the result. .o$ever, +#C verification flo$ can be changed based on individual bank6s re-uirement.

Introduction
A +oint of Sale is an electronic device that allo$s a bank6s customers to make payment for their purchase of goods > commodities > merchandise. They are called +OS, as these are placed at merchant6s locations i.e. at the point of sale and enables buyers to make payment electronically. The debit cards or credit cards can be used for such payments. The cards are s$iped in the +OS system and customers are asked to sign on the charge slip or vouchers to confirm the payment. /xamples for usage of +OS are 3 *rocery stores *as stations &iscount superstores Book stores Ticket counters +harmacies .otels > !estaurants

A Brief Bistory* .istory sho$s that +oint of Sale systems can be traced back to year N9DB $hen the idea of developing "ash !egister $as mooted by Rohn !itty in &ayton since he faced issues in his business for improper accounting of cash. !itty finally succeeded in inventing a "ash !egister, patented and named as ;!itty6s #ncorruptible "ashier=. #n August NADH #B5 announced the #B5 HILB and HIIB Store Systems that $ere, in essence, a mainframe computer packaged as a store controller that could control NE9 #B5 HILH>HIIH point of sale registers. This system $as the first commercial use of client3server technology, peer to peer communications, 'ocal Area Cet$ork 1'AC2 simultaneous and remote initialization. By mid3NADF, it $as installed in +athmark Stores in Ce$ Rersey and &illard%s &epartment Stores. Today6s modern3day computer driven multi3faceted point of sale system is an enhanced version of the earlier cash register. This has got more functionality and is integrated $ith other host of applications. Technical , 2perations +oint of Sale systems is an electronic device having serial ports connected through a leased or dials up line to the .ost system for transmitting the transactions for authorizations. #t is controlled by the soft$are provided by the +OS machine vendor and stores the transaction data in the terminal. /ach +OS machine

must follo$ the data encryption standards 1&/S2 as per Q#SA > 5aster"ard norms and data is encrypted $ith &(0+T 1&erived (ni-ue 0ey +er Transaction2. Transactions done through +OS machines are encrypted $ith these security keys and are transmitted to the .ost applications. &uring /nd3of3&ay operations, merchant transmit the consolidated transaction data as a batch to the .ost application. The consolidated transaction amount less the charges applicable by the .ost service provider $ill be credited to the 5erchant6s account after processing the transaction. ,e$ examples of +OS vendors are N. Qerifone E. .ypercom H. Curit, etc #arts,Components of a #2" machine $% #2" :-lectronic Data Capture .-DC/ Terminal*

This is a normal +OS machine unit $hich contains data card slots, thermal printers, 'AC port, @ireless modem, internal pin>key pad, internal smart card reader, '/& display unit and rechargeable battery. &% A all in one #2" machines have the follo=ing parts*

N. +OS computer having "+( $ith +OS soft$are loaded by the vendor. E. T,T 5onitor $ith key display H. Bar3"ode scanner F. "ash dra$ers L. *raphical customer displays

I. 0ey Boards D. 5agnetic Stripe !eaders 15S!2 9. +#C +ads A. !eceipt printers Functionalities "upported* +OS systems support the follo$ing functionalities N. Sale and purchase Transactions E. +reauthorization transaction or blocking the funds. H. Balance in-uiry 1only debit cards2 F. Qoid transaction $here transactions are cancelled by making it voids. L. Ad4ustments I. Tip3ad4ust 1restaurants only2 D. !efund 9. Settlement of transactions 1 /nd of &ay operations2 Transaction flo= N. 5erchant > "ustomer s$ipes the card in +OS machine E. 5erchant enters the transaction amount. H. "ustomer enters +#C 1if +#C re-uired2 F. +OS system encrypts the security key and transmits the data to S$itch application. L. S$itch system process the transaction a. #dentify issuer b. Qalidate the card c. Qalidate the +#C d. !oute the transaction to destination system I. S$itch system $ait for the response, receives it and send back to +OS. D. +OS receives the transaction completion message. #f successful, prints the charge slip>voucher for the amount. 9. "ustomer signs the voucher.

A Brief Bistory*
Tracing back the history of a 0iosk system sho$s that the first self3service, interactive kiosk $as developed in NADD at the (niversity of #llinois at (rbana3"hampaign by a pre3med student, 5urray 'appe. The content $as created on the +'ATO computer system and accessible by plasma touch screen interface and he named it as GThe +lato .otline6. .e created this for allo$ing students and visitors to find movies, maps, directories, bus schedules, extracurricular activities, courses and email student organizations The first successful net$ork of interactive kiosk used for commercial purposes $as a pro4ect developed by the shoe retailer ,lorsheim Shoe "o. #n NAAN the first commercial kiosk $ith internet connection $as displayed at "omdex. The application $as for locating missing children. The first touch screen is sho$n by /lotouch at the NA9E @orld%s ,air in 0noxville, TC, (SA. NA9E is also the first year that the $ord ?#nternet? is used. Technical , 2perations Technically, kiosks are similar in appearance like an AT5, but don6t have all the features of an AT5. 0iosks are also controlled by the centralized s$itching system like an AT5 terminal. 'ike an AT5 it is also a dumb terminal $here it follo$s the instructions from the controlling s$itch.

+arts > "omponents of a 0iosk contain the follo$ing T,T '"& 5onitor 0iosk "omputer 8"+( 5agnetic "ard !eader 5#"! "heck reader Signature "apture "ard Bill acceptor !eceipt +rinter Additional options 3 @eb "am, Speakers, 5icrophone, etc

Functionalities "upported* 0iosks systems support the follo$ing functionalities Balance /n-uiry ,und > @ire Transfer Bill +ayments Statement printing 1if supported2 #nformation 3+roduct #nformation, etc Application capturing "heck processing

Transaction flo= The flo$ for balance in-uiry in a 0iosk is as follo$s N. "ustomer s$ipes > inserts the card

E. "ustomer enters +#C and select Balance #n-uiry option H. 0iosk system encrypts the security key and transmits the data to S$itch application. F. S$itch system process the transaction a. #dentify issuer b. Qalidate the card c. Qalidate the +#C d. !oute the transaction to destination system L. S$itch system $ait for the response, receives it and send back to 0iosks I. 0iosk receives the transaction completion message and displays it.

A brief history
#n NAAB the @ells ,argo Bank, based in "alifornia (SA, introduced the $orld%s first online banking service. #t $as not until NAAD that a similar service $as launched in the (0 by the Cation$ide Building Society. Since the introduction of the first services many banks have started their electronic banking services $ith access available via personal computer, mobile phone, or an interactive Television. 5any banks no$ offer #nternet based services alongside their traditional banking facilities, $hilst other organisations have established ne$ breeds of %#nternet% or %Telenet% banks. Telenet banks are those that allo$ their customers to communicate by telephone as $ell as the #nternet. 5ost of the (0%s ne$ %#nternet or %Telenet% offerings have the backing of large and $ell kno$n financial institutions. Technical Architecture , 2perations

#nternet banking is usually conducted through a personal computer 1+"2 that connects to a banking @eb site via the #nternet. ,or example, a consumer at home accesses a financial institution%s @eb site via a modem and phone line or other telecommunications connection, and an #nternet service provider of that individual country, such as AT)T @orldCet in (SA, Aortal> BSC' > !eliance in #ndia, etc. #nternet banking also can be conducted via $ireless technology through +ersonal &igital Assistants 1+&A2 or cellular > mobile phones. Components of 8et Banking* *pplication Server$ An application server is a server program in a computer in a distributed net$ork that provides the business logic for an application program. The application server is fre-uently vie$ed as part of a three3tier application, consisting of a graphical user interface 1*(#2 server, an application 1business logic2 server, and a database and transaction server. +nternet #onnectivit($ Cet connections either 'AC > @AC or @ireless. Bro%sers$ A bro$ser is soft$are that provides a $ay to vie$ $eb pages. The t$o most popular $eb bro$sers are 5icrosoftc #nternet /xplorer and Cetscapec Cavigator. Fire%all$ A fire$all is a small program that helps protect your computer and its contents from outsiders on the #nternet or net$ork. @hen properly installed, it prevents unauthorised traffic to and from your +". ,e- Server$ @eb servers are computers on the internet that host $ebsites, serving pages to vie$ers upon re-uest. This service is referred to as $eb hosting. /very $eb server has a uni-ue address so that other computers connected to the internet kno$ $here to find it on the vast net$ork. The #+ 1#nternet +rotocol2 address looks something like this IA.AH.NFN.NFI. This address maps to a more human friendly address, such as $$$.abcbank.com Host *pplications $here financial transactions are transmitted for authorization. ,or example, "ore Banking solution.

The other concepts connected $ith Cet banking are Digital #ertificates$ A digital certificate is an electronic #& card that helps establish your identity $hen doing business via the #nternet. Such certificates can be bro$ser based 1;Soft "ertificates=2 or embedded into a smart card 1;.ard Token=2 and used $ith special card readers. .ncr(ption$ #nternet Banking uses NE93bit encryption, one of the most advanced technologies available for safeguarding your online banking. /ncryption is a process that transforms sensitive information into a string of unrecognisable characters before they are sent over the #nternet. /ncryption helps provide a secure channel for data transmission to keep information private bet$een the bank%s computer system and your #nternet bro$ser. Secure Sessions$ @hen you log in to #nternet Banking you are said to be in a ;secure session=. SS' technology is used $ithin your #nternet Banking session to encrypt information before it leaves your computer, in order to ensure that no one else can read it. SS' or Secure Sockets 'ayer is a security protocol created by Cetscape that has become an international standard on the #nternet for exchanging sensitive information bet$een a $ebsite and the computer communicating $ith it, referred to as the client. #oo/ies$ "ookies are small files stored on a computer%s hard drive. "ookies are generally harmless and are used to recognise a user so that they can receive a more consistent experience at a particular $ebsite. "ookies can contain information about your preferences that allo$s customisation of a site for your use.

Functionalities supported Cet Banking system supports the follo$ing functionalities Account #n-uiries3Balance, transaction history, statement, loan limit, etc. Account Opening 8 &eposits, Standing #nstructions > mandate, etc. "heck stop payments > check book re-uests ,und Transfer o To o$n account o Third party account o &esignated account 8 +ayee maintenance account $here a template is created for regular payees. (ser can select the desired payee from the list available. Bill +ayments to utility providers 1(+2 $ho have a tie up $ith the bank for this purpose. #t is applicable only after the bank has assigned an account 1SAQ#C*S>"(!!/CT>*' or any other type2 to the (+. +ass$ord > Address "hange, etc Other services o Standing #nstructions > 5andate o Order &emand &raft o !e-uest issue of 'etter of "redits > *uarantee 5essage and bulletins +roduct #nformation

Transaction Flo= The flo$ for Account #n-uiry in is as follo$s

"ustomer enters +#C and Account Cumbers on Cet 1client bro$ser2 SS' encrypts the +#C and data and transmits to the @eb Server through ,ire$all. @eb Server accepts the transaction message, authenticate the SS' encryption. #f correct, $eb server sends the re-uest to Cet banking application. Cet banking application authenticates the +#C and re-uests the customer data from .ost Application. ,or example, "ore Banking Solution. .ost system provides the customer information to Cet banking system. @eb Server collects customer data and displays in customer personal computer.

Internet Banking Risks #nternet banking creates ne$ risk control challenges for banks. ,rom a supervisory perspective, risk is the potential that events, expected or unexpected, may have an adverse impact on the bank6s earnings or capital. The defined nine categories of risk for bank supervision purposes are credit, interest rate, li-uidity, price, foreign exchange, transaction, compliance, strategic, and reputation. These categories are not mutually exclusive and all of these risks are associated $ith #nternet banking. .o$ever, the most vulnerable risk is security risk on transactions. "ecurity issues in online banking #nternet security is al$ays an issue and is regularly commented upon in the media. The #nternet is constantly changing and undergoing development and hence it is $ise to make sure that you are using the latest version of a $ell kno$n #nternet bro$ser. 5ost data transferred over the #nternet is normally unencrypted. This means that anyone intercepting that data can read it. This is normally not a problem as most internet data is not sensitive or private. To protect the secrecy of any data you transfer over the #nternet sensitive information can be encrypted using SS'. SS' technology means that the any data you send or receive over the #nternet is encoded in a $ay that makes it almost impossible to read by anyone that is not supposed to receive it. All they $ill see is a meaningless stream of data if they try to listen in on your transactions. The effectiveness of SS' is measured in bits 1binary digits2. The latest $eb bro$sers support NE93bit encryption that provides a high level of security that should foil all but the most determined federal authorities in decoding its contents. As $ith all computer based security there are a number of steps you should take yourself to protect your security details Cever $rite do$n your #&, pass$ord or +#C number Cever give them to anyone else Cever send them via email 1email is COT secure or private2 #f given the option to set a pass$ord for your #nternet banking service, never use an obvious pass$ord or a pass$ord that someone $ho kno$s you might guess @hen you have finished $ith your #nternet banking session, al$ays close your bro$ser so that someone else can%t access your account details after you leave your +".

Overall if you bear these guidelines in mind, then the likelihood of you being a victim of any #nternet fraud is extremely lo$ indeed.

Introduction
Since the inception of alternate delivery channels like the AT5 and net banking there has been a sea of change $itnessed in the servicing of customers by offering ne$er products and services by Banks and financial institutions. Banks $ere al$ays $aiting for some innovative $ays to encash the opportunities for business gro$th. Then came the mobile banking revolution. The G5obile6 phone gives the the user the mobility to carry it any$here he $ants. 5obile phones have penetrated deep in to the mass of population. As mobile technology advances the features and functionality improve. The tremendous progress and achievements noticed in telecommunication sector has sho$n far reaching results to the Banking #ndustry also. Today, $ith the support of latest technologies and secured net$orks, customer can conduct financial and non3financial transactions effortlessly and securely.

A brief history Since inception of AT5 channels in NAIA in Banking, the customers $idely accepted the Gbanking at their convenience6 concept though it didn6t provided full fledged banking functionalities. Banking revolutions continued since then. Cet Banking came in mid NAABs $ith a broader outlook on Gconvenient banking6 concept $here #nternet banking enabled the customers to operate their accounts at their convenience sitting at home or office. .o$ever, penetration of net banking in to the mass population is still in developing stages in some of the countries due to the non3availability of personal computers and internet connectivity every $here. The same period sa$ explosive gro$th in mobile communication penetration in developing markets like #ndia, "hina ) 0orea, etc. These factors resulted in the rollout of 5obile Banking services channel by Banks ) financial institutions by leveraging the advancements in mobile communication technology. Technical Architecture , 2perations A sample of 5obile banking architecture is provided belo$.

The 5obile Banking Services offered by a bank can be classified based on the originator of service as +ush or +ull. A +ush Service is $hen the bank proactively sends out information about promotional activities offered by the bank or alerts based on certain rules setup in the system. Best example is a Structured 5essage Services 1S5S2 alert $hen your account is overdra$n. A +ull service is $hen the customer re-uests for a service or information from the bank and the bank sends the information to the customer in the form of a S5S message. These are t$o3$ay exchanges as banks need to take some action for the user re-uest. 5obile banking services can also be categorized based on the nature of service as N. Transaction Based and E. /n-uiry Based A re-uest for mini statement is termed as an en-uiry based service $hile a re-uest for fund transfer is termed as a transaction based service.

Components of +obile banking system* 5obile phones $ith net facilities +hone Banking client application 8 &o$n loaded from application service provider. 5obile Operators 8 Application Service +roviders @A+ gate$ay @eb Server 5essage +rocessing Server .ost Application 1for example, "ore Banking solution2

Functionalities supported Transactions based services o +ull Based

,und Transfer Bill +ayment Stop "he-ue o +ush Based Co services #n-uiry based services o +ull Based #n-uiries 8 Balance, Statement, check status, check book re-uest, recent transaction history, re$ards point, etc. o +ush Based Alerts 8 "redit, &ebit, 5inimum balance, bill payment, payment due, large transaction, check bounce, account overdra$n, etc.

Transaction Flo= @hen a customer applies for the mobile banking service, the customer is registered for the service, the account number, mobile number and the rules based on $hich the customer $ishes to get the messages are captured. #4"B +essages* The $ay +(S. messages $orks is The rules define the kind of +(S. messages the customer re-uire and also the threshold amounts $hich $ould trigger the messages. @hen the system encounters an event $hich satisfies the rule setup for a customer, then the message is triggered. The System could use standard templates to create message and send the message to the customer.

#4!! +essages* The $ay +('' messages $orks is7 The customer re-uests for information by sending an S5S containing a service command to a pre3 specified number. Based on the key$ord> service command, the system $ill trigger action retrieve information form the core banking application. (sing a standard message template send the information in the form of a S5S to the mobile number registered by the customer.

3hat is an I6R An #nteractive Qoice !esponse 1#Q!2 processes inbound phone calls, plays recorded messages including information extracted from databases and the internet, and potentially routes calls to either in3house service agents or transfers the caller to an outside extension. #t is a soft$are application that accepts a combination of voice telephone input and touch3tone keypad selection and provides appropriate responses in the form of voice, fax, callback, e3mail and perhaps other media. (sing computer telephony integration 1"T#2, #Q! applications can hand off a call to a human being $ho can vie$ data related to the caller at a display.

#nteractive Qoice !esponse 1#Q!2 systems, $ith more advanced voice automation technologies, are used by many financial institutions to .andle routine and more complex transactions using the speech3driven technologies to give customers faster, more convenient access to a $ide range of information, from account in-uiries and mortgage balances to stock prices, current interest rates, special services, and even the location of AT5s in a far3a$ay city based on their calling location. !educe service costs. +rovide faster and convenient banking. Boost overall customer satisfaction

"ustomer transaction and financial data are protected by incorporating advanced encryption and security features. +ublic and private sector businesses of all sizes are using #Q! technology for sales, marketing, customer service, collections, in-uiry and support calls to and from their organization. A brief history Tracing back the history of #Q! sho$s that it began in NAFN $hen Bell Systems developed a ne$ tone dialing methodology, $hen they unveiled the first telephone that could dial area codes using &ual Tone 5ulti ,re-uency signaling technology. #t $as bet$een the periods NADB39B $hen more companies started using the #Q! systems to automate tasks in call centers, the #Q! technology started changing $hen ne$ competitors entered the market. .o$ever, the #Q! systems shot into prominence, $hen call centers began to migrate to multimedia contact centers in late AB6s. "ompanies invested in @eb3enablement and "omputer Telephony #ntegration 1"T#2 $ith #Q! systems. #Q! became vital for call centers deploying universal -ueuing and routing solutions and acted as an agent $hich collected customer data to enable intelligent routing decisions. The introduction of the QO5' standard also simplified the integration process bet$een #Q! systems and any back end hosts. .istorically, #Q! solutions have used pre3recorded voice prompts and menus to present information and options to callers, and touch3tone telephone keypad entry to gather responses. 5odern #Q! solutions also enable input and responses to be gathered via spoken $ords $ith voice recognition. Technical Architecture > Operations involved

"alls are ;received= by the #Q! and the caller is directed for the next step. The caller $ill utilize a brief series of key presses on a touch3tone phone or $ith voice recognition7 the caller may optionally speak the selections $hen prompted. The application $ith #Q! may be connected to the organization6s data processing systems to provide virtually any information or operation that you $ish to make available. #Q! applications can dra$ information from databases or input data or responses gathered from each person they contact. They can also gather input and make decisions based on spoken $ords $ith voice recognition technology. "omponents of #Q! > +hone Banking +STC 'ine +STC 1public s$itched telephone net$ork2 is the $orld%s collection of interconnected voice3oriented public telephone net$orks, both commercial and government3o$ned. +rivate Branch /xchange 1+BO2 The #Q! Application is connected to a +BO. A +BO is a telephone system $ithin an enterprise that s$itches calls bet$een enterprise users on local lines $hile allo$ing all users to share a certain number of external phone lines. The main purpose of a +BO is to save the cost of re-uiring a line for each user to the telephone company%s central office. @eb Servers7 @eb servers are computers on the internet that host $ebsites, serving pages to vie$ers upon re-uest. This service is referred to as $eb hosting. QoiceO5' This is an application of the /xtensible 5arkup 'anguage O5' $hich, $hen combined $ith voice recognition technology, enables interactive access to the @eb through the telephone or a voice3driven bro$ser. An individual session $orks through a combination of voice recognition and keypad entry. This $as created through a collaboration of AT)T, #B5, 'ucent Technologies, and 5otorola, $ho $ere each $orking on their o$n approach but 4oined forces to create an open standard.

Functionalities supported

#n-uiry o Account Balance 8 'oan>deposit, etc o "he-ue status o #nformation

o !ates !e-uests o Statement !e-uests o "he-ue book re-uests o Stop payment o 'ast statement o 'ast five transaction o +#C change o 'ost > replacement card. Bill +ayments ,und Transfer Standing #nstructions

Transaction Flo= A sample #Q! call flo$ is sho$n belo$.

S "ustomer dial in to #Q! system S (pon receiving an incoming phone call, the #Q! phone system triggers the services to check for an #Q! script. S The #Q! client process 1#Q! Application2 invokes a server process on the #Q! phone system and starts a t$o3$ay communication. S An #Q! program controls the flo$ of the #Q! script by prompting the caller and re-uesting key input or directing the caller to another service, extension, or Qoice 5ail.

Introduction
"all "enters or "ontact "enters is one of the most spoken terms $hen $e talk about Business +rocess Outsourcing 1B+O2 as a cost cutting measure. Both terminologies go hand3in3hand and it has caught the $orld6s attention in the recent past due to the various industry outsourcing deals for establishing contact or call centers out of their countries. Outsourcing to other countries can reduce operational expenditure. .o$ever, differences in culture and language may have some problems for customers, $hose

dissatisfaction can lead to customer complaints also. @e have noticed the mushrooming of call centers but at the same time they have been a lot of help to the customers of various segments, including households, industries like banking, insurance, customer care, transportation, etc as an easy $ay of service>solution provider. The availability of call centers round the clock, helped the service reach out to other geographies. #n countries $ith /nglish speaking proficiencies, like #ndia, the visibility of call centers has reached far across globe, making it a global hub for call centers. A brief history .istory sho$s that, "all centres originated as a cost3cutting measure by (S companies several decades ago, but they only really started to take off in the (0 in the NADBs. The initial centres $ere in3house operations in larger organisations and they tended to share and be formed by the same basic assumptions and drivers. The idea of a contact center $as to "luster the ma4ority of telephone based contacts $ith the customer in a single department, so that people could focus 4ust on call3related services. Benefit out by carefully managing $ith a clear focus on to provide efficient service and reduce the service cost.

+erhaps one of the most useful evolutions of interactive voice response has been the ability to provide accurate and satisfying EFhr support. @hatever the business, #Q! permits companies to help their potential customers at 4ust about any time of the day. This not only decrease expenses, but $ill also makes it easier for administrative professionals to take care of calls coming in at strange periods or perhaps $hen the telephone system is overloaded. Technical Architecture 5ost of the "all "enters follo$s the #Q! system for routing the customer calls, the same architecture and operations are applicable to call center also. The call center process starts $hen the call is diverted to an active agent or helpdesk person to service the client. Functionalities supported 5ultiple vendor products are available in the market for "all centers and most of them provide the comprehensive functionalities. Some of the generic functionalities supported are N. #Q! E. Skills based routing H. +redictive &ialer F. Blended inbound>outbound, L. NBB: call recording I. /mail facility D. "hat $hisper coaching, 9. Barge3in, A. Skills base routing NB. !emote agent, NN. !eports > logs, etc Transaction Flo=

Transaction flo$ is also similar to #Q! > +hone Banking except #Q! responding back $ith pre3recorded message. @hen the call is diverted to an active agent, the agent $ill provide the information customer re-uested for. .o$ever, an active agent does not have the privilege to execute a financial transaction on behalf of the customer. "all center personnel can have only limited access to vie$ the customer data like transaction, charges, interest, etc and sensitive data is masked from visibility. "all center personal can raise a re-uest on behalf of the customer to the customer service executives for resolving it and responding to the client.

Banking Agents A Banking Agent is retail or a postal outlet that processes clients6 transactions under contract $ith a Bank>,inancial institution or a mobile net$ork operator.

These agents are usually e-uipped $ith a combination of point3of3sale 1+OS2 card reader, mobile phone, barcode scanner to scan bills for bill payment transactions, +ersonal #dentification Cumber identification number 1+#C2 pads, and sometimes personal computers 1+"s2 that connect $ith the bank6s server using a personal dial3up or other data connection. "lients that transact at the agent use a magnetic stripe bank card or their mobile phone to access their bank account or e3$allet respectively. #dentification of customers is normally done through a +#C, but could also involve biometrics. @ith regard to the transaction verification, authorization, and settlement platform, banking agents are similar to any other remote bank channel.

'ocal regulation $ill determine if financial institutions are allo$ed to $ork through retail outlets. !egulators generally determine $hat kind of, if any, financial institutions are permitted to contract banking agents, $hat products can be offered at the retail outlets, ho$ financial institutions have to handle cash transport, 0no$ Vour "ustomer re-uirements, consumer protection, and other operational areas. *lobally, these retailers and post offices are increasingly utilized as important distribution channels for financial institutions. The points of service range from post offices in the Outback of Australia $here clients from all banks can conduct their transactions, to rural ,rance $here the bank "redit Agricole uses corner stores to provide financial services, to small lottery outlets in Brazil at $hich clients can receive their social payments and access their bank accounts. T6 Banking TQ Banking is a ne$ concept introduced recently in #ndia $hich aims at revolutionizing Banking by bringing it into the customer6s living room. "ustomers can access details and information regarding all banking services even if they do not have internet access through a Satellite &T. or &igital "able connection. The follo$ing services are available through TQ Banking ,eatures> information on the Bank6s products /ligibility criteria for products 5andatory documents 'oan /5# "alculators>"harts

"urrent offers #nvestment updates #nterest3rate charts Branch>AT5 locator Safe Banking Tips .o$ to pay bills online .o$ to give standing instructions on one6s credit card Toll3free number for the client to reach the Bank or to apply for a product

Advantages* "ustomer convenience 3 banking from one6s living room #nternet connection not re-uired @ider reach EFxD availability Tero charges

,inancial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include ,oreign exchange, Shape, Qolatility, Sector, 'i-uidity, #nflation risks, etc. Similar to general risk management, financial risk management re-uires identifying its sources, measuring it, and plans to address them. ,inancial risk management can be -ualitative and -uantitative. As a specialization of risk management, financial risk management focuses on $hen and ho$ to hedge using financial instruments to manage costly exposures to risk. #n the banking sector $orld$ide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks. The follo$ing topics are covered as part of !isk 5anagement
#ntroduction Anti 5oney 'aundering Asset 'iability 5anagement Basel3## #,!S Sarbanes3Oxley "ompliance

Introduction
"ommercial banks are private corporations that provide payments services, financial intermediation, and other financial services in anticipation of earning profits from those activities. The payments system and intermediation are re-uired for economic gro$th. 'ike any other for3profit corporation, their principal goal is to maximize shareholder $ealth. Thus, decisions on lending, investing, borro$ing, pricing, adding ne$ services, dropping old services, and other activities depend on the impact on shareholder $ealth.

Shareholder $ealth is measured by the market value of a bank6s stock and the amount of cash dividends paid. 5arket value depends on three factors 1N2 the amount of cash flo$s that accrue to bank shareholders, 1E2 the timing of cash flo$s, and 1H2 the risk involved in those cash flo$s. 5anagement decisions involve evaluating the impact of various strategies on the return and the risk of those cash flo$s.

Types of Risks
Introduction to Risk in Banks Banks make money in one of the t$o $ays By providing services to customers By taking risks The former $ay provides very less or no margin to Banks To be in business Banks must take risk Banks take more risk it can expect to make more profits *reater risk also increases the danger that the bank could lose badly and be forced out of business due to bankruptcy

Risk: Return relationship in Banks @hile a positive risk3return relationship is presented for profitable Banks, the risk3return relationship is negative for profitless banks. Theoretically, a Bank taking a relatively high risk is supposed to earn high profits. .o$ever, Bankruptcy costs are relatively high for a Bank maintaining higher risk exposure. #f Bank is internationally active, such high risk exposure could also lead to cascading effect to other Banks and thereby might lead to country6s insolvency.

3hat should BankEs obAective be to respond to such sensitive ambience and still make profits7 Banks must run their operations $ith t$o goals in mind o *enerate +rofit o Stay in Business To achieve above, t$o goals of risk management for every Bank should be o &ecide Bank6s /conomic "apital /nsure that the risk being taken is matched to the bank6s capital Bank6s capital is considered much enough to absorb the losses of bad situations o Allocate Bank6s /conomic "apital .elp the "/O direct the limited resource of capital to the opportunities that are expected to create maximum return $ith the minimum return. o !isk 5easurement and 5anagement in Banks attempts to ans$er the follo$ing four -uestions .o$ much could $e loseK "alculate the risk measure "an $e absorb a significant loss $ithout going bankruptK &ecide the economic capital #s the return high enough for us to take that riskK "alculate the return after considering risk .o$ can $e reduce the riskK (se risk mitigation techni-ues .edge !isk

Transfer !isk &iversify !isk

Types of Risks in Banks Broad Classification* The risk in Banks arises mainly through the exposure taken on various assets. Typically, the key types of risk $ithin the assets of a firm are classified as follo$s S Credit risk 8 losses associated $ith the default 1or credit do$ngrade2 of an obligor 1a counterparty, borro$er or debt issuer2. Also called default risk7 S +arket risk 8 losses associated $ith changes in market values7 S 2perational risk 8 losses associated $ith operating failures. 2ther Financial Risk Types , Terminologies* There are other financial risk variants too $hich more or less 1directly > indirectly2 could be considered part of the "redit, the 5arket and or the Operational risk. These risk variants> terminologies are necessary to understand the topics discussed in subse-uent sections. Interest Rate Risk* The risk that an investment%s value $ill change due to a change in the absolute level of interest rates, in the spread bet$een t$o rates, in the shape of the yield curve or in any other interest rate relationship. #nterest rate risk is the risk to earnings and capital that market rates of interest may change unfavorably. This risk arises from differences in timing of rate changes and the timing of credit flo$s 1repricing risk2, from changes in the shape of the yield curve, and from option values embedded in bank products. #n essence, the market value of a bank6s assets 1i.e., loans and securities2 $ill fall $ith increases in interest rates. #n addition, earnings from assets, fees and the cost of borro$ed funds are affected by changes in interest rates. Banks can reduce their interest rate risk by hedging $ith derivative securities and by using the asset> liability management techni-ues. Banks fund these assets by liabilities on $hich they pay floating rates of interest. As deposit interest rates increase, interest income drops. The risk is managed by matching maturities and interest basis of assets and liabilities. !i'uidity Risk* There are three types of 'i-uidity !isks 8 ,unding 'i-uidity !isk, Asset 'i-uidity !isk and 5arket 'i-uidity !isk. Funding Li0uidit( Ris/ is the inability of a bank to raise funds at normal cost. "ost of funds is a critical profitability driver of a bank, but is set in part by the market6s perception of the bank6s risk and funding policy. *sset Li0uidit( ris/ is the risk to earnings or capital related to a bank6s ability to meet its obligations to depositors and the needs of borro$ers by turning assets into cash -uickly $ith minimal loss, being able to borro$ funds $hen needed, and having funds available to execute profitable securities trading activities. *iven the large amount of bank deposits that must be paid on demand or $ithin a very short period, li-uidity risk is of crucial importance in banking. This risk has a direct bearing on the nature of bank6s assets. .olding a pool of assets acts as a cushion against market li-uidity as it allo$s a bank to meet obligations $ithout recourse to external financing. #n some regulatory environments, there is a re-uirement to hold a specific percentage of assets in cash and bank balances to protect against short3run obligations.

Mar/et Li0uidit( Ris/ relates to problems of transaction volume in markets. #n volatile circumstances $hen counter3parties are un$illing to trade, prices can become very volatile and spreads $iden. #n these conditions it may be very difficult to li-uidate assets at a fair price. Reinvestment Risk The risk that the proceeds from a bond $ill be reinvested at a lo$er rate than the bond originally provided. Call Risk "all !isk is the risk that a bond $ill be called by its issuer. "allable bonds have call provisions post issuance generally on one of the interest payment date. This provision allo$s the bond issuer to purchase the bond back from the bondholders and retire the issue before maturity date. This is usually done $ith an expectation that interest rates $ill fall and issuer is in a position to borro$ at lo$er interest rates. "all provisions allo$ the issuer to retire the old, high3rate bonds and issue ne$ bonds > borro$ at a lo$er rate. Default Risk The risk that the bond%s issuer $ill be unable to pay the contractual interest or principal on the bond in a timely manner, or at all. Currency Risk or Foreign -1change Risk #t is the risk to earnings or capital due to changes in foreign exchange rates. #t can arise in three $ays viz., Transaction !isk and Translation !isk and /conomic !isk. 'ransaction Ris/ is a form of market risk and relates to the movement in the value of the financial transaction due to exchange rate movements. Transaction risk causes cash losses. 'ranslation Ris/ is a risk of an adverse impact on the balance sheet $hen foreign assets are translated into the home currency for reporting purposes. .conomic Ris/ is a risk that a bank could lose business to competitors in other countries. This is due to the exchange rate bet$een currencies is more favorable to the foreign banks. "overeign , Country Risk* A collection of risks associated $ith investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk, $hich is the risk of capital being locked up or frozen by government action. "ountry risk varies from one country to the next. Some countries have high enough risk to discourage much foreign investment. Traded Credit Risk This risk applies to derivatives that buy and sell credit contracts. ,or example, if a bank sells a futures option, on a credit agreement expecting interest rates to fall. #f the interest rates rise, they $ould lose a potential profit. Inflation Risk The risk that the rate of price increases in the economy deteriorates the returns associated $ith the bond. This has the greatest effect on fixed bonds, $hich have a set interest rate from inception. +anaging Risk in Bank at +acro !evel

three keys for risk3management deciding the target debt rating determining the amount of available capital allocating risk limits to each business unit $ithin the bank

Determining the Target Debt Rating

The debt rating is a measure of the bank%s credit$orthiness and corresponds to the bank%s probability of default A high debt rating corresponds to a lo$ probability of default o ,or example, AAA3rated Bank vs. A3rated Bank The bank%s credit$orthiness is determined by o The amount of risks a bank takes o The amount of capital a bank hold "apital is the difference in value bet$een the bank%s assets and liabilities. #t can be vie$ed as the current net $orth of the bank #f the bank has a small amount of capital and takes a large amount of risk, there is a high probability that the losses $ill be greater than the capital, and the bank $ill go bankrupt #f the bank $ants a high rating, it must hold a large amount of capital in relation to its risks. o But a bank have to pay cost for holding extra capital in hand o ,or example, by given fixed total profit of a bank, the average profit for per capital $ill decreases $hen the amount of capital increases A lo$ target debt rating has the advantage that the bank can take on many risks and expect to earn a high rate of return for the shareholders. o .o$ever, a lo$ debt rating means that debt holders $ill charge higher interest rates to lend their money to the more risky bank To conclude, a bank has to decide a suitable debt rating for itself and then decide the capital it has to maintain.

Determining the Amount of Available Capital The available capital is the current value of the assets minus the current value of the liabilities "apital W Cominal Asset Qalue3'iabilities #f the board $ishes to increase the capital -uickly, it can do so by issuing more bank shares This gives the bank more cash $ithout increasing the liabilities to avoid default. Alternatively, the capital can be increased over several years by retaining earnings and not paying dividends to shareholders

Allocating Risk !imits Once the target debt rating is set and the amount of available capital has been calculated, the bank%s total risk capacity is fixed The next -uestion is ho$ to allocate the total risk capacity to the different business units o !etail banking, "orporate Banking7 o Activities !etail 'ending, "orporate 'ending, #nvestments 3trading, credit cards, etc. #n doing this it must consider

o o o

the expected return and risk from each unit the diversification of the risk bet$een units #n general, $e $ill allocate most 1not all2 of the risk capacity to the units that are expected to make the highest returns

4nderstanding Credit, +arket and 2perational Risk in Banks Sources of different types of risk to Bank are the assets they hold. .ence to understand the various types of risk, it is $orth to kno$ the generic assets Banks hold. ;'he assets are composed of all the items %hich are in possession of or due to the -an/ (from customers1 other -an/s1 Govt21 etc 1 and it relies upon these assets to meet the lia-ilities %hich it o%es to others2 =

4nderstanding Credit Risk

"redit risk is the risk of loss arising from the non3payment of principal ) interest 1obligation2 by the borro$er 1obligor2 on time. Any amount of fund lent to a borro$er is exposed to certain level of credit risk 1unless lent to someone $ho is considered default risk free2. The price of loan or debt instrument $hich has higher credit risk is high relative to one $ith less credit risk. Banks add a premium on risk to the price of the asset based on the level of credit risk they are exposed to. ,or instance a loan given to business person might be highly priced $hen compared to a loan given to a salaried person. #t is usually associated $ith loans and investments, but it can also arise in connection $ith derivatives, foreign exchange, and other extensions of bank credit. "redit risk is the primary cause of bank failures and Bank6s success depends on ho$ $ell this risk is managed.

"redit !isk arises due to the failure of the borro$er, endorser, guarantor or counter3party to repay a loan or to honor another financial obligation. "oncentration !isk Besides the risk at the account or borro$er level, $hat impacts banks more is the high concentration of credit in select industries, similar profiled customers and > or geographies. A higher concentration of credit, e.g., to one specific industry, surely leads to a bank failure if the industry is into recession>economic do$nturn. To avoid "oncentration !isk, Banks should diversify the credit portfolio across various industries, *eographies and > or different customer profile. Based on diversification of credit portfolio, risk limits 1maximum exposure2 for each Banking +roduct>Asset, #ndustries, *eographies and > or customer profile should be set. Also manager should monitor that at any given point in time these limits are not violated. An overall limit to$ards assets $hich expose to "redit risk is decided based on the capital bank is prepared to devote to Bank lending>investment activities. This sets the maximum exposure that a Bank can take into assets $ith credit risk.

4nderstanding +arket Risk 5arket risk refers to changes in the value of financial instruments or contracts held by a Bank due to unpredictable fluctuations in prices of traded assets and commodities as $ell as fluctuations in interest and exchange rates and other market indices. 'oss of money due to change in the value of an instrument. Source of 5arket risk is Sales and Trading *roup activities of the Bank. This group deals in investment activities of Bank and takes exposure in tradable debt and e-uity securities, and derivatives and thereby exposes Bank to 5arket risk. 5arket !isk ,actors o Stock price ,or example, in a recession period, the S)+LBB index fall do$n, then the price of the security a bank holds $ill fall do$n as $ell. o /xchange rate ,or example, if a Bank holds a foreign bond and the foreign currency depreciates. o #nterest rate ,or example if a Bank holds a bond and the interest rate increases. 5arket !isk involves the changes in e-uity and commodity prices and the follo$ing areas o #nterest rate !isk o "urrency !isk o Traded "redit !isk o 'i-uidity !isk and o +roduct !isk

4nderstanding 2perational Risk &efinition ;The risk of direct or indirect losses resulting from inade-uate or failed internal processes, people and systems or from external events=. Operating risk includes fraud and the possibility of a mistake being made. #t includes 'egal risks. Operational risk does not include strategic risk ;the risk of a loss arising from a poor strategic business decision. Operational risk does not include reputation risk ;damage to an organization through loss of its reputation or standing=. Since this could be result of operational failures as $ell as other events. Operational risk encompasses the efficiency and effectiveness of all back3office operations including 5#S, personnel, compliance, external and internal frauds, la$suits, and so on.

The /nron bankruptcy case $as mainly due to Operation !isk, specifically the lack of transparency in financial statements, biased Audit practices, etc. Operational !isk /vent Type "ategories o #nternal ,raud 3 misappropriation of assets, tax evasion, intentional mismarking of positions, bribery, etc. o /xternal ,raud3 theft of information, hacking damage, third3party theft and forgery o /mployment +ractices and @orkplace Safety 3 discrimination, $orkers compensation, employee health and safety, etc. o "lients, +roducts, ) Business +ractice3 market manipulation, antitrust, improper trade, product defects, fiduciary breaches, account churning, etc. o &amage to +hysical Assets 3 natural disasters, terrorism, vandalism, etc. o Business &isruption ) Systems ,ailures 3 utility disruptions, soft$are failures, hard$are failures, etc. o /xecution, &elivery, ) +rocess 5anagement 3 data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets, etc.

Risk from Different Bank Assets* The assets discussed belo$ include the usually held 1and not all2 assets by Banks. Cash Risk Associated* Co risk Due from overnment Treasury* Risk Associated* "ountry > Sovereign !isk !oans and Advances* Associated risk* "redit > &efault !isk Con3payment of interest and > or +rincipal Amount Credit Card Receivables* Associated risk* "redit > &efault !isk Con3payment of interest and > or +rincipal Amount Investments in "ecurities 0 "hort Term and !ong Term* #nvestments held by Bank include many variants of &ebt and /-uity Securities, ranging from different maturities 1held to maturity category2 and tradable securities. Belo$ is a list of securities $ith the associated risk. Bonds Bond is a &ebt Security, in $hich issuer of the Bond o$es the holders a debt. Based on Bond terms issuer is obliged to pay interest 1on given terms -uarterly>semi3annually>yearly2 and repay the principal at a later date termed as maturity. Types of Bonds and Risks Associated* Fi1ed Rate Bonds* Bonds $ith fixed interest rate paid on agreed dates throughout the life of bond. On maturity the issuer should repay principal to the bond holder.

Associated Risk* "redit > &efault !isk Con3payment of interest and > or +rincipal Amount #nterest !ate The risk that Bond value $ill change $ith change in the interest rates. Also reinvestment risk and inflation risk Kero:Coupon Bonds* Bonds issued at discount, pay no interest but principal repaid on maturity date. The bondholder receives full principal amount on the redemption date. ,or instance, Tero3coupon bond valued MNBB but issued at discounted price MAL. On maturity date the Bondholder receives principal amount of MNBB 1not the discounted value MAL2. Associated Risk* "redit > &efault !isk Con3payment of interest and > or +rincipal Amount #nterest !ate The risk that Bond value $ill change $ith change in the interest rates. Also reinvestment risk and inflation risk. Callable Bonds* Bonds that gives issuer the right 1may or may not exercise2 to repay the bonds on the call dates $hich is before the maturity date. Associated Risk* "redit > &efault !isk Con3payment of interest and > or +rincipal Amount #nterest !ate The risk that Bond value $ill change $ith change in the interest rates. Also "all !isk, reinvestment risk and inflation risk Floating Rate 8otes* 1,!Cs2 have a variable coupon that is linked to a reference rate of interest, such as '#BO! or /uribor. ,or example the coupon may be defined as three month (S& '#BO! ` B.EB:. The coupon rate is recalculated periodically, typically every one or three months. Associated Risk* "redit > &efault !isk Con3payment of interest and > or +rincipal Amount #nterest !ate The risk that Bond value $ill change $ith change in the interest rates. Also reinvestment risk and inflation risk. -'uity "ecurities* All the e-uity securities that are traded on organized markets like Stock /xchanges. Associated !isk 5arket !isk and 'i-uidity !isk Derivatives* &erivative instruments are financial instruments $hich derive their value from the value and characteristics of one or more underlying assets. They can be divided into exchange3traded derivatives and over3the3counter 1OT"2 derivatives. For=ards* "ontracts to purchase or sell a specific -uantity of a financial instrument, a commodity, or a foreign currency at a specified price determined at the outset, $ith delivery or settlement at a specified future date. Settlement is at maturity by actual delivery of the item specified in the contract, or by a net cash settlement. Associated Risk* Cone

Interest Rate "=aps* "ontracts to exchange cash flo$s as of a specified date or a series of specified dates based on a fixed and floating interest rates. "ash flo$s from a fixed interest rate are s$apped $ith floating interest. Associated Risk* #nterest rate risk that originates from changes in the floating rate. #n a plain vanilla fixed3for3floating s$ap, the party $ho pays the floating rate benefits $hen rates fall and vice versa. Currency s=ap* A currency s$ap is a foreign3exchange agreement bet$een t$o parties to exchange aspects 1namely the principal and>or interest payments2 of a loan in one currency for e-uivalent aspects of an e-ual in net present value loan in another currency Associated Risk* Cone Futures* "ontracts similar to for$ards but $ith the follo$ing differences futures are generic exchange3 traded, $hereas for$ards are individually tailored. ,utures are generally settled through an offsetting 1reversing2 trade, $hereas for$ards are generally settled by delivery of the underlying item or cash settlement. Associated risk* 5arket !isk 2ptions* "ontracts that give the purchaser the right, but not the obligation, to buy 1call option2 or sell 1put option2 a specified -uantity of a particular financial instrument, commodity, or foreign currency, at a specified price 1strike price2, during or at a specified period of time. These can be individually $ritten or exchange3traded. The purchaser of the option pays the seller 1$riter2 of the option a fee 1premium2 to compensate the seller for the risk of payments under the option. Associated risk* 5arket !isk

Bo= Banks can lose money7 *enerally Blends of &ifferent !isks Often Banks lose money from an incident that involves several forms of risk ,or instance, the "ase of Barings Bank Cick 'eeson $as a trader in the Singapore branch of Barings Bank. .e had seemingly generated EB: of Barings profit in NAAF. #n fact, he had been making losses and hiding them n a fictitious account. 1Operating !isk2 To recover the losses he tried a large, risky gamble $ith derivatives on the CikkieEEL index. 15arket !isk2 #n NAAL, he lost MN billion and consumed out Baring6s capital. .e $as able to hide the original losses because he $as in charge of both trading and accounting in the Singapore office. 1Operation !isk2 .e $as able to take the final gamble on Cikkie because Senior 5anagement had no effective oversight and > or measurement or the risks being taken. 1lack of risk management > measurement> reporting tool2

Role of Capital in Banks

;"apital represents an ideal metric for aggregating risks across both different asset classes and across different risk types. @hy so=K This section explains the significance of "apital in Banks vis3_3vis any other firm. Banks generate revenue by taking on more exposure to their customers and by earning appropriate return to compensate for the risk of this exposure. #n general, if a bank takes on more risk, it can expect to earn a greater return. The trade3off, ho$ever, is that the same bank $ill, in general, increase the possibility of facing losses to the extent that it defaults on its debt obligations and is forced out of business. Banks that are managed $ell $ill attempt to maximize their returns only through risk taking that is prudent and $ell informed. The primary role of risk management function in a bank is to ensure that the total risk taken across the enterprise is no greater than the bank6s ability to absorb $orst3case losses $ithin some specified confidence interval. "apital represents the difference bet$een the market value of bank6s assets and the market value of its liabilities. "apital can be vie$ed as a buffer against insolvency. "apital ade-uacy is a measure of bank6s ability to remain a going concern under adverse conditions. The primary role of capital in a bank is to act as a buffer to Absorb large unexpected losses +rotect depositors and other claim holders +rovide enough confidence to external investors and rating agencies on the financial health and viability of the firm.

A Bank6s credit rating can be seen as a measure of its capital ade-uacy and is generally linked to a specific probability that the firm $ill enter into default over some period of time. Bank6s $hich hold more capital are able to take on more riskier assets than firms of similar credit rating $hich hold less capital.

3hy Banks are regulated


Before kno$ing $hat are the regulations it is necessary to kno$ $hy Banks are regulated. 3hy are Banks regulated7 The most common ob4ectives of Bank regulation are #rotect the publicEs savings deposited in banks #f Banks have no regulation on ho$ they could use the funds collected from +ublic as &eposits. The Bank employee6s definitely cannot use it for their personal purpose nor could they use it to gamble or buy $eapons7 Control the money supply Banks are expected to maintain cash and li-uid asset reserve ratio as mandated by the ,ederal > "entral Bank. They cannot simply lend all the money they have collected from various sources like deposits, e-uity capital, borro$ings, etc. #f they are allo$ed money supply $ould increase, interest rates $ill fall do$n thereby impacting the economy of the country. -nsure ade'uate supply of loans and to ensure fairness +ricing of Bank assets is regulated. ,or instance, in #ndia, the minimum price for a loan given by bank should be at least the prime lending rate 1+'!2. They cannot lend at a price $hich is belo$ +'!. 'ike$ise, interest rates offered on

&eposits are also controlled. Some of the Banks also provide subsidized rates for certain loans e.g., ,arm 'oans, special considerations for /ducational 'oans. Banks to promote economic gro$th are mandated by ,ederal>"entral Bank to perform certain activities. +aintain confidence in the Financial "ystem The regulations by ,ederal !eserve Bank ensure confidence in system. Avoid monopoly po=ers #magine if there $ere no such regulations on $ho can act as Bank and the &o6s and &on6ts on banking business. +eople $ith money $ould have had their o$n terms in lending money. These issues $ere seen in traditional Banking system and $hich lead to many regulations imposed on Banks. #rovide support for overnment activities "upport special sectors of the economy The sectors like agriculture, #mport > /xport business, /ducation, .ealth "are, Scientific !esearch, etc., are promoted by *overnment and have been given certain special considerations for the $elfare of the country per se. Impact of Bank failure is high and could fail the Financial "ystem of country% *enerally failure in one Bank could cascade to the failure of several Banks and their by collapse the economy.

Bank Regulatory -nvironment* Bank regulations are government regulations $hich sub4ect banks to certain re-uirements, restrictions and guidelines. 2bAectives of bank regulation The ob4ectives of bank regulation, and the emphasis, vary bet$een 4urisdictions. The most common ob4ectives are +rudential 33 to reduce the level of risk bank creditors are exposed to 1i.e. to protect depositors2 Systemic risk reduction 33 to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or ma4or bank failures Avoid misuse of banks 33 to reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds of crime To protect banking confidentiality "redit allocation 33 to direct credit to favored sectors #nstruments and re-uirements of Banks regulation

$% Capital Re'uirement The capital re-uirement sets a frame$ork on ho$ Banks must handle their capital in relation to their assets. The Bank for #nternational Settlements6 Basel "ommittee on Banking Supervision influences each country6s "apital re-uirement. #n NA99, "ommittee introduced a capital measurement system through Basel "apital Accord 1Basel #2 The latest capital ade-uacy frame$ork is commonly kno$n as Basel ##

&% Reserve Re'uirement

The minimum reserve each Bank must hold to demand deposits and bank notes. Banks, $here applicable, must hold li-uid assets as per the reserve re-uirement stipulated by the country6s ,ederal Bank. The purpose of minimum reserve is li-uidity. &ue to global emphasis on "apital Ade-uacy, the minimum reserve re-uirement has lost its significance. Only fe$ countries still have such minimum reserve re-uirement for their Banks.

(% Corporate overnance "orporate governance re-uirements are intended to encourage the bank to be $ell managed, and is an indirect $ay of achieving other ob4ectives. To be a body corporate 1i.e. not an individual, a partnership, trust or other unincorporated entity2 To be incorporated locally, and>or to be incorporated under as a particular type of body corporate, rather than being incorporated in a foreign 4urisdiction. To have a minimum number of directors To have an organisational structure that includes various offices and officers, e.g. corporate secretary, treasurer>",O, auditor, Asset 'iability 5anagement "ommittee, +rivacy Officer etc. Also the officers for those offices may need to be approved persons, or from an approved class of persons. To have a constitution or articles of association that is approved, or contains or does not contain particular clauses, e.g. clauses that enable directors to act other than in the best interests of the company 1e.g. in the interests of a parent company2 may not be allo$ed.

9% Financial Reporting and Disclosure Re'uirements: Banks may be re-uired to +repare annual financial statements according to a financial reporting standard, have them audited, and to register or publish them +repare more fre-uent financial disclosures, e.g. Uuarterly &isclosure Statements .ave directors of the bank attest to the accuracy of such financial disclosures +repare and have registered prospectuses detailing the terms of securities it issues 1e.g. deposits2, and the relevant facts that $ill enable investors to better assess the level and type of financial risks in investing in those securities.

;% Credit rating re'uirement* Banks may be re-uired to obtain and maintain a current credit rating from an approved credit rating agency, and to disclose it to investors and prospective investors. Also, banks may be re-uired to maintain a minimum credit rating. <% !arge e1posures restrictions* Banks may be restricted from having imprudently large exposures to individual counterparties or groups of connected counterparties. This may be expressed as a proportion of the bank%s assets or e-uity, and different limits may apply depending on the security held and>or the credit rating of the counterparty. >% Related party e1posure restrictions*

Banks may be restricted from incurring exposures to related parties such as the bank%s parent company or directors. Typically the restrictions may include /xposures to related parties must be in the normal course of business and on normal terms and conditions /xposures to related parties must be in the best interests of the bank /xposures to related parties must be not more than limited amounts or proportions of the bank%s assets or e-uity.

Banking Regulations* ,ollo$ing Banking regulations are in place to ensure the instruments to Banking !egulations 5inimum "apital !e-uirement, "orporate *overnance and ,inancial !eporting and &isclosures are practiced. The belo$ listed are most commonly follo$ed regulations by internationally active Banks. Basel ## 1originally introduced as Basel "apital Accord2 Anti35oney 'aundering 1A5'2 Sarbanes3Oxley Act EBBE 1SOO2 Asset 'iability 5anagement 1A'52 #,!S 1originally #ASB2

3hat is +oney !aundering 7


5oney laundering, the metaphorical ?cleaning of money? $ith regard to appearances in la$, is the practice of engaging in specific financial transactions in order to conceal the identity, source, and>or destination of money, and is a main operation of underground economy. #n the past, the term ?money laundering? $as applied only to financial transactions related to organized crime. Today its definition is often expanded by government regulators 1such as the (nited States Office of the "omptroller of the "urrency2 to encompass any financial transaction $hich generates an asset or a value as the result of an illegal act, $hich may involve actions such as tax evasion or false accounting. As a result, the illegal activity of money laundering is no$ recognized as potentially practiced by #ndividuals, Small and large businesses, "orrupt officials, 5embers of organized crime 1such as drug dealers or the 5afia2 or of cults, and "orrupt states, through a complex net$ork of shell companies and trusts based in offshore tax havens.

As per (S 'a$s, money laundering has been defined as ;the movement of illicit cash or cash e-uivalent proceeds into, out of, or through the (nited States 1or2 (nited States ,inancial #nstitutions 1,#s2.= Anti +oney !aundering* Anti3money laundering is a term mainly used in the finance and legal industries to describe the legal controls that re-uire financial institutions and other regulated entities to prevent or report money laundering activities. Anti money3laundering guidelines came into prominence globally after the September NN, EBBN attacks and the subse-uent enactment of the (SA +atriot Act.

Today, all financial institutions globally are re-uired to monitor, investigate and report transactions of a suspicious nature to the financial intelligence unit of the central bank in the respective country. ,or example, a bank must perform due diligence by having proof of a customer%s identity and that the use, source and destination of funds do not involve money laundering. (nited States federal la$ related to money laundering is implemented under the Bank Secrecy Act of NADB as amended by anti3money laundering acts up to the present. #rocess of +oney !aundering* 5oney laundering is often described as occurring in three stages +lacement 'ayering #ntegration

S #lacement* !efers to the initial point of entry for funds derived from criminal activities. #nitiated $ith placement of illegally derived funds into financial system> 1generally an institution2. &epositing cash into a Bank account. 'arge amounts are broken into smaller less conspicuous amounts &eposit of these small amounts in different times of a single or in multiple financial institutions. The exchange of one currency into another7 "onversion of larger denominations into smaller denominations7 #llegal funds converted into financial instruments like money orders, securities, etc.,

+urchase of an insurance contract "o3mingled $ith legitimated money to divert suspicion

S !ayering* !efers to the creation of complex net$orks of transactions $hich attempt to obscure the link bet$een the initial entry point, and the end of the laundering cycle. Starts after the illegal money is entered into financial system>institution7 ,unds, securities, insurance contracts, etc., are converted or moved to other institutions to further separate them from their criminal source7 ,unds are again used to purchase other securities, insurance contracts or other easily transferable investment instruments7 These are sold through yet another institution7 ,unds could also be transferred by a form of negotiable instrument such as check, money order or bearer bond7 ,unds may be transferred electronically to other accounts in various 4urisdictions7 +ay for goods or services7 Transfer the funds to a shell corporation7 S Integration* !efers to the return of funds to the legitimate economy for later extraction. #nvolves the integration of funds into legitimate economy7 Accomplished through purchase of assets, such as real estate, securities or other financial assets, or luxury goods7 S The same three stages are also seen in terrorist financing schemes, except that stage three integration involves distribution of funds to terrorists and their supporting organizations7 The A5' Cet$ork recommends usage of terms .ide, 5ove and #nvest instead of +lacement, 'ayering and #ntegration respectively. 2ccurrence of +oney !aundering and Terrorist Financing 5oney laundering and terrorist financing can occur in any country in the $orld7 *enerally targeted to countries $ith complex financial systems7 "ountries $ith lax, ineffective, or corrupt A5' and "ombating the ,inancing of Terrorism 1",T2 infrastructures are likely targets for such activities7 Co country is exempt.

A+! Regulations* 5any 4urisdictions adopt a list of specific predicate crimes for money laundering prosecutions as a ?self launderer? 1the (0 has an ?all3crimes? regime2. #n addition, A5'>",T la$s typically have other offences such as ?tipping off,? ?$illful blindness,? not reporting suspicious activity, and conscious facilitation of a money launderer>terrorist financier to move his>her monies. The 4"A !egislation* The 5oney 'aundering "ontrol Act of NA9I made money laundering a federal crime. #n the (nited States, ,ederal la$ provides 1in part2 ?@hoever . . . kno$ingdlye . . . conducts or attempts to

conduct . . . a financial transaction $hich in fact involves the proceeds of specified unla$ful activity . . . $ith the intent to promote the carrying on of specified unla$ful activity . . . shall be sentenced to a fine of not more than MLBB,BBB or t$ice the value of the property involved in the transaction, $hichever is greater, or imprisonment for not more than t$enty years, or both.? A5' la$s also apply to terrorist financing, including any legally obtained funds if intended for use in planning, committing, or concealing a terrorist act. Three key la$s lay out the basic anti3money laundering obligations of (S ,inancial #nstitutions o The Bank Secrecy Act 1BSA2 of NADB o The 5oney 'aundering "ontrol Act of NA9I, and o The (S +atriot Act of EBBE 1Amended to above t$o la$s2 There are similar la$s for other countries too. The anti3money laundering la$s are designed to prevent terrorists and other criminals from utilizing ,inancial #nstitutions to commit their crimes.

4"A #ATRI2T ACT* The (SA +AT!#OT Act, commonly kno$n as the ?+atriot Act? An Act of the (.S. "ongress and signed into la$ by +resident *eorge @. Bush on October EI, EBBN. Title of the Act is a contrived acronym, $hich stands for (niting and Strengthening America by +roviding Appropriate Tools !e-uired to #ntercept and Obstruct Terrorism Act of EBBN. Act dramatically reduced restrictions on la$ enforcement agencies% ability to search telephone, e3 mail communications, medical, financial, and other records7 /ased restrictions on foreign intelligence gathering $ithin the (nited States7 /xpanded the Secretary of the Treasury6s authority to regulate financial transactions, particularly those involving foreign individuals and entities7 and Broadened the discretion of la$ enforcement and immigration authorities in detaining and deporting immigrants suspected of terrorism3related acts. /xpanded the definition of terrorism to include domestic terrorism, thus enlarging the number of activities to $hich the (SA +AT!#OT Act6s expanded la$ enforcement po$ers could be applied.

5no= Four Customer .5FC/* 0V" is the due diligence that financial institutions and other regulated companies must perform to identify their clients. Banks ascertain relevant information pertinent to doing financial business $ith them. 0V" is a policy implemented to conform to a customer identification program mandated under the Bank Secrecy Act and (SA +AT!#OT Act. 0V" policies are becoming increasingly important globally to o prevent identity theft fraud, o money laundering and o Terrorist financing. #n a simple form these rules may e-uate to ans$ering t$elve -uestions, but this is the tip of the iceberg and regulators no$ expect much more. 0V" should not be thought of as a format to be filled 3 it is a process to be undergone from the start of a customer relationship to the end.

0V" verifies that the customer is not on any list of kno$n fraudsters, terrorists or money launderers, such as the Office of ,oreign Assets "ontrol%s Specially &esignated Cationals list 1O,A" 'ist2. This list contains thousands of entries and is updated at least monthly. 0V" verifies customers on the sanctions lists too. There are lists of third party vendors that track links bet$een persons regarded as high3risk o$ing to negative reports in the media about them or in public records. 0V" controls6 monitors transactions of a customer against their recorded profile, history on the customers account1s2 and $ith peers. Banks doing 0V" monitoring for A5' and "T, purposes increasingly use specialized transaction monitoring soft$are, particularly names analysis soft$are and trend monitoring soft$are. The generated alerts identify unusual activity $hich is then sub4ect to due diligence or enhanced due diligence 1/&&2 processes that use internal and external sources of information on the sub4ect, including the internet. This helps to determine $hether a transaction or activity is suspicious and re-uires reporting to the authorities. #n the (S SA! is filed $ith ,inancial "rimes /nforcement Cet$ork 1,in"/C2. 'ike$ise in the (0 reporting to Serious Organized "rime Agency 1SO"A2.

0V" has different connotations and the definition above is from an A5'>",T perspective. 0no$ Vour "ustomer processes are also employed by regular companies of all sizes, for the purpose of ensuring their proposed agents, consultants or distributors anti3bribery compliance. Banks, insurers and export credit agencies are increasingly demanding that customers provide detailed anti3corruption due diligence information, to verify their probity and integrity. A+! , CFT 0 Financial Action Task Force .FATF/* The ,inancial Action Task ,orce 1,AT,2, also kno$n by its ,rench name *roupe d%action financifre 1*A,#2, is an intergovernmental organization founded in NA9A by the *D. The purpose of the ,AT, is to develop policies to combat money laundering and terrorist financing. The ,AT, Secretariat is housed at the head-uarters of the O/"& in +aris. The ,AT, ,orty !ecommendations and Special !ecommendations on Terrorist ,inancing The primary policies issued by the ,AT, are the ,orty !ecommendations on money laundering and the A Special !ecommendations 1S!2 on Terrorist ,inancing 1T,2. Together, the ,orty !ecommendation and Special !ecommendations on Terrorist ,inancing set the international standard for anti3money laundering measures and combating the financing of terrorism and terrorist acts. They set out the principles for action and allo$ countries a measure of flexibility in implementing these principles according to their particular circumstances and constitutional frame$orks. Both sets of ,AT, !ecommendations are intended to be implemented at the national level through legislation and other legally binding measures. The ,AT, issued the ,orty !ecommendations in NAAB and completely revised them in NAAI and EBBH. The current 1EBBH2 ,orty !ecommendations re-uire states, among other things, to #mplement relevant international conventions "riminalize money laundering and enable authorities to confiscate the proceeds of money laundering

#mplement customer due diligence 1e.g. identity verification2, record keeping and suspicious transaction reporting re-uirements for financial institutions and designated non3financial businesses and professions /stablish a financial intelligence unit to receive and disseminate suspicious transaction reports, and cooperate internationally in investigating and prosecuting money laundering.

The ,AT, issued 9 Special !ecommendations on Terrorist ,inancing in October EBBN, follo$ing the September NN terrorist attacks in the (nited States. The ,AT, issued a ninth Special !ecommendation on Terrorist ,inancing in October EBBF. The Special !ecommendations on Terrorist ,inancing broadly extend the application of the ,orty !ecommendations to terrorist financing and introduce ne$ re-uirements relating to services such as alternative remittance, $ire transfers and cash couriers as $ell as non3profit organisations. Financial Intelligence 4nit .FI4/ &efinition A central, national agency responsible for receiving 1and, as permitted, re-uesting2, analyzing, and disseminating to the competent authorities, disclosures of financial information 1i2 concerning suspected proceeds of crime, or 1ii2 re-uired by national legislation or regulation, in order to counter money laundering. ,AT, re-uires countries to establish an ,#(, $hich has three essential functions o The collector or repository of reported information, o Analysis function and, o ,inancial information sharing for detecting and countering money laundering and terrorist financing.

Features of A+! "ystem* Satisfy !egulatory !e-uirements Suspicious Activity 5onitoring O,A" and Other Sanction 'ist +rocessing 0no$ Vour "ustomer "ustomer &atabase Scanning +ayment 5onitoring Be easy to use and change +rovide long3term cost effectiveness

5ey Components of A+! Compliance "ystem*

Challenges in A+!* Sophisticated techni-ues used to launder money and finance terrorism add to the complexity of these issues. 'aunderers are very creative $hen overseers detect one method to filter such activities, the criminals soon find another. .ence scenarios built in the system to filter suspicious activities are not good enough7 A+! 2pportunities* Soft$are industry is developed around providing soft$are To analyze transactions to identify transactions or To identify patterns of transactions that may constitute illegal financial activity. ,inancial institutions face penalties for failing to properly file reports "ash Transaction !eport 1"T!2 Suspicious Activity !eport 1SA!2 A serious violation could lead to heavy fines and regulatory restrictions even to the extent of charter revocation. These soft$are applications effectively monitor bank customer transactions on a daily basis and using customer historical information and account profile, provide a ?$hole picture? to the bank6s A5' compliance management. Transaction monitoring includes cash deposits and $ithdra$als, $ire transfers, credit card activity, che-ues 1checks2, share 1securities2 dealing and Automated "learing .ouse 1A".2 activity. #n the banking terminology, these applications are kno$n as ?A5' soft$are?.

Introduction
A'5 process involves managing Bank6s assets and liabilities $ith the scope of follo$ing functions. 'i-uidity !isk 5anagement #nterest3rate risk management ,unding and capital planning +rofit planning and gro$th pro4ection

A!+ 2rganiDation The Bank directors have overall responsibility of managing A'5 risks and should have risk management policy of the bank. A committee ;Asset 'iability "ommittee 1A'"O2 consisting of senior management including "/O should be set up. An A'5 desk consisting of operating staff should be responsible of analyzing, monitoring and reporting the risk profiles to the A'"O. The A'"O is a decision making unit.

A!+ is a strategic management tool to manage t=o types of risks* #nterest3!ate !isk The interest3rate risk arises from the possibility that profits $ill change if interest rates change. ,unding3'i-uidity !isk The li-uidity risk arises from the possibility of losses due to the bank having insufficient cash on hand to pay the obligations 1> or to the customers2. Both risks are due to the difference > mismatch bet$een Bank6s assets and liabilities.

4nderstanding Interest:rate risk for A!+* 'he -est illustration of +nterest-rate ris/ for *LM $ !2S2 savings and loan (S3L crisis o Savings and loan banks retail banks, receive retail deposits and make retail loans o ,or many years, interest rates $ere stable. &eposits for around F: 1floating rate2, and they lent HB3year mortgages paying about 9: at fixed rates. o Then in the NA9Bs, the ,ederal !eserve allo$ed interest rates to float. Short3term interest rates rose to NI:. o 5any deposit customers $ithdre$ their funds or demanded the higher rates. o The rate of mortgages is fixed $ith 9:, ho$ever the rate of deposits is floating and the banks have to pay NI: for the deposits of customers. o This caused the banks a lot of loss and most banks $ere bankrupt. o The cascading effect impacted entire Banking system not 4ust in (S but also in other countries. Some pointers from the a-ove illustration of *LM$ o o o o The rate of deposit is floating and the rate of mortgage is fixed. The deposit 1loan2 is more 1less2 sensitive to interest rate. O!, the &eposits 1the bank6s liabilities2 are rate3sensitive and the 5ortgages 1Bank6s assets2 are rate3insensitive. The interest rate risk rises $hen risk sensitive liabilities 1!S'2 are not e-ual to risk sensitive assets 1!SA2.

4nderstanding Funding:!i'uidity Risk for A!+ The funding3li-uidity risk arises from mismatches bet$een the assets and liabilities. This risk arises because banks generally fund themselves $ith liabilities that have very short contractual maturity 1e.g., demand deposits such as checking accounts2. Banks take the money they receive from these liabilities, set aside a small amount in cash, and invest the rest in assets that have long maturity, e.g., commercial loans.

#n general, customers leave most of their money in the demand deposits for a long time, and the small amount of cash that the bank sets aside is sufficient to meet customers% re-uests for $ithdra$als. .o$ever, if $ithdra$als are unusually high, there is a risk that the bank $ould not have enough cash to meet the demand. #n such a situation, the bank%s choices can be simplified into three o Borro$ money from other banks, if they are $illing and able to supply more cash7 o Sell some of the loans, possibly at deeply discounted prices7 o &efault to the customers, and go out of business. This risk of defaulting or being forced to sell at a loss is called funding3li-uidity risk or cash3crisis risk. ,unding3li-uidity risk is different from the li-uidity risk pertaining to trading risk. The li-uidity risk in trading arises from the possibility of the bank6s losing money by being locked into a position that is losing value. But in A'5, $e are concerned that the bank $ill be unable to raise enough cash to pay its customers, or that it $ill be forced to sell 1?cash in?2 assets at an a$k$ard moment, incurring a significant li-uidation cost.

Background of the Basel Capital Accord The Basel Accords refer to the banking supervision Accords 1recommendations on banking la$s and regulations2, Basel # and Basel ## issued 1and Basel ### under development2 by the Basel "ommittee on Banking Supervision 1B"BS2. They are called the Basel Accords as the B"BS maintains its secretariat at the Bank of #nternational Settlements in Basel, S$itzerland and the committee normally meets there. #n NA99, the Basel "ommittee on Banking Supervision 1B"BS2, a group of banking regulators from leading industrialized nations, established regulations regarding the amount of capital banks hold against credit risk. The ma4or impetus for this Accord $as the concern of the *overnors of the *NB central banks that the capital of the $orld%s ma4or banks had become dangerously lo$ after persistent erosion through competition. Introduction to Basel Accord Basel3# $as original Basel Accords, $hich are recommendations on banking la$s and regulations issued by B"BS in Ruly NA99. Basel # $as motivated by t$o interacting concerns The risk posed to the stability of the global financial system by lo$ capital levels of internationally active banks, and The competitive advantages accruing to banks sub4ect to lo$er capital re-uirements. ,undamental Ob4ectives of Basel # Accord o Strengthening the soundness and stability of the international banking system. o &iminishing an existing source of competitive ine-uality among international banks

-lements of the Basel I Accord The Basel "ommittee released its final version of the Basel # Accord in Ruly NA99. The elements of the accord $ere +rovided "apital Ade-uacy Standards "ommon frame$ork for capital measurement Addressed only "redit risk in the Original Accord

5arket risk $as addressed later in NAAI as amendments to original Accord The basic approach $as o Assign each asset or off3balance sheet item held by a bank to one of five risk categories o "alculate the capital re-uired for each asset or item based on risk $eighting, and o Add all these amounts to produce the total minimum capital to be held by the bank.

Basel I Capital Ratio , Cooke Ratio 1Total "apital2 > 1@eighted "redit !isk ` @eighted 5arket !isk2 gW 9:, $herein risk $eight is flat per cent rate per asset category.

The Accord provided t=o minimum capital ratios* Bank6s "ore "apital or Tier N "apital At least F: of risk $eighted assets Bank6s Total "apital or Tier E "apital At least 9: of risk $eighted assets

Definition of Capital in Basel I .Capital -lements/* Tier N included o +aid (p Share "apital > "ommon Stock o &isclosed !eserves Tier E included o (ndisclosed reserves o Asset revaluation reserves o *eneral +rovision or 'oan3loss reserves o .ybrid 1&ebt > /-uity2 "apital instruments o Subordinated debt 'imitations and !estrictions o Total of Tier E elements limited to a maximum of NBB: of total of tier N elements. o Subordinated term debt limited to a maximum of LB: of Tier N elements. o 'oan3loss reserves limited to a maximum of N.EL percentage points. o Asset revaluation reserves that take the form of latent gains on unrealized securities sub4ect to a discount of LL:.

Dra=backs , "hortfalls in Basel I Capital Accord 'imited guidelines for credit risk and collateral evaluation Sovereign > "ountry !isk $as totally ignored $hile there $ere specific cases of country economy facing collapse. Co re$ard for good credit risk practices Co distinction bet$een high3risk and lo$3risk loan portfolios Co guidelines for ad4usting collateral value Co ad4ustments for sovereign>country risk *eneral tendency $as that more than re-uired capital $as set aside by Banks impacting their +rofitability. Co attention to operational risk Operational !isk Co standards for assessing levels of operational risk

Introduction to Basel:II Basel ## is the second of the Basel Accords, $hich are recommendations on banking la$s and regulations

issued by B"BS. These accords $ere originally published in Rune EBBF. #urpose of Basel II Addressing the limitations of Basel # Accord +rovide more risk sensitive 5inimum "apital calculation ,rame$ork *oals of Basel ## To discourage the manipulation and mishandling of regulatory capital. To re$ard banks that reduced their business risk levels by improving their risk management systems. Areas of Special Attention "redit !isk Operational !isk

"cope of Application of Basel:II ,rame$ork is applied on a consolidated basis to internationally active banks. The .olding company > parent entity should ensure that it captures the risk of the $hole banking group. The frame$ork $ill also apply, on a fully consolidated basis, to all internationally active Banks at every tier $ithin a Banking group. #ndividual Banks under a *roup> parent Bank are ade-uately capitalized on a stand3alone basis.

"tructure of Basel II : The Three #illars The Basel ## regulations are structured as three pillars as given in the picture.

#illar I : +inimum Capital Re'uirements Calculation of +inimum Capital Re'uirements o "alculation of the total minimum capital re-uirements for "redit, 5arket and Operational !isk o "alculated using definition of regulatory capital and risk3$eighted assets o Total "apital !atio must be no lo$er than 9:. o Tier E "apital is limited to NBB: of Tier N "apital. 5aintenance of "apital for three ma4or components of risk "redit risk, 5arket !isk and Operational !isk !egulatory "apital o Tier N "apital as per Basel # /-uity "apital ` &isclosed !eserves from +ost Tax !etained /arnings ,ollo$ing deductions must be made from Tier N *ood$ill #ncrease in e-uity capital resulting from a securitization exposure #nvestments in subsidiaries engaged in banking and financial activities $hich are not consolidated in national systems o Tier E "apital Other elements, other than those included in Tier N capital $ill be admitted into Tier E limited to NBB: of Tier N. The Tier E includes (ndisclosed reserves !evaluation reserves *eneral provisions > general loan loss reserves .ybrid &ebt "apital #nstruments o Tier H "apital Short3term subordinated debt covering market risk Tier H capital $ill be limited to ELB: of a bank6s Tier N capital that is re-uired to support market risks. Risk 3eighted Assets o Total risk $eighted assets are determined by multiplying the capital re-uirements for market risk and operational risk 1i.e., reciprocal of the minimum capital ratio of 9:2 and adding the resulting figures to the sum of $eighted assets for credit risks. Calculation of Credit Risk B"BS permits Banks to calculate capital re-uirements for credit risk by t$o approaches o Standardized manner supported by external credit assessments Standardized Approach o #nternal rating based approach, $hich is sub4ect to explicit approval of the bank6s supervisor and allo$s use of internal rating6s system. The approach has t$o versions of credit risk calculation. ,oundation 8 #nternal !atings Based Approach 1,3#!B2 Advanced 8 #nternal !atings Based Approach 1A3#!B2 Calculation of Credit Risk 0 "tandardiDed Approach o !isk $eights are based on the credit rating>assessment of the assets This is a revision of Basel # intended to make more risk sensitive "redit rating provided by external credit assessment institutions 1/"A#2 is used. ,or each category of rating, a !isk $eight is defined. The risk $eights range from EB: LB NLB: for all the assets except for past due loans and securitized assets. ,or past due over AB day, net of specific provisions the $eights range from LB: to NLB: based on the specific provisions made for these loans.

!isk $eights on "laims from Banks cannot be lesser than the risk $eight given to its Sovereign of incorporation. There are thirteen categories of risk $eights defined by Basel ## in this approach. !isk @eighted Assets > !isk Ad4usted Assets W Asset /xposure 1e.g., "laims from sovereigns2 O risk $eight. This is calculated for each of the assets. The total of all risk $eighted assets is considered as /xposure at &efault and is substituted in the capital charge calculation formula. "apital "harge "apital charge is a function of the follo$ing components. +robability of &efault 1+&2 'oss *iven &efault 1'*&2 /xposure at &efault 1/A&2 and 5aturity

Calculation of Credit Risk 0 Foundation Internal Rating Based Approach o (nder #!B approach, sub4ect to certain minimum conditions and disclosure re-uirements and supervisory approval for use of this approach, banks may rely on their o$n estimate of risk components in determining capital re-uirements for a given exposure. o Banks must classify their banking book exposures in six broad classes of assets "orporate, Sovereign, Bank !etail, /-uity and purchased receivables. Also should identify L sub classes $ithin "orporate and H sub lasses $ithin retail asset classes7 o Bank should internally create a +robability of default estimates for each of this assets categorized. Apply the Bank calculated estimates of +robability of default and rely on supervisory estimates for other risk components '*&, /A& and 5aturity. o "alculate the capital charge based on above.

Calculation of Credit Risk 0 Advance Internal Rating Based Approach o o The only difference in this approach from the ,oundation one is Banks create models to compute their o$n estimates for risk components +&, '*& and /A& and their o$n calculation of 5aturity 152 sub4ect to meeting minimum standards. Apply the computed risk components to calculate the capital charge.

Calculation of +arket Risk ,or 5arket !isk the preferred approach is Qalue at !isk 1Qa!2 $hich provides the output /xpected 'oss from asset exposure to$ards 5arket risk. Calculation of 2perational Risk o Basel ## has given guidance to H broad methods of "apital calculation for Operational !isk. They are Standardized Approach 1TSA2 Basic #ndicator Approach 1B#A2 Advanced 5easurement Approach 1A5A2

Basic Indicator Approach 3 based on a fixed percentage 1or alpha2 of the Bank6s annual gross income.

"tandardiDed Approach 8 Basel ## identifies 9 business lines and for each of these provides Beta ,actor in percentage 1risk ad4ustment factor2 for ad4usting the gross income to derive the capital charge. The capital charge is obtained by multiplying gross income of each of the business lines of a bank by a fixed percentage 1beta factor2 and summing across business lines. Advanced +easurement Approaches 8 (nder this method the regulatory capital re-uirement $ill depend on the risk measure generated by the bank6s internal operational risk management system. .o$ever, in order to use this approach, the bank must demonstrate that its operational risk measure meets a soundness standard comparable to that of #!B approach for credit risk. Banks $ill arrive at the /xpected 'oss as an output of their measurement system.

S #illar II Supervisory !evie$ +rocess o /nsure Sound +rocesses o /nsure ade-uate capital at all times o /nsure motivation for improving risk management practices S #illar III 5arket &iscipline o Uualitative and -uantitative disclosure of undertaken risks and risk methodologies Issues and Challenges* &epending on its current risk management processes, size, customers, portfolio, and market, a particular bank is likely to experience varying effects of Basel ## on at least four levels, as described belo$. Internal Impact* Basel ##6s focus on enhanced risk sensitivity $ill prompt an enhanced focus on economic capital management, versus regulatory capital management, because the Ce$ Accord drives banks to measure their performance against risk factors other than market share or expected return. (nder Basel #, most banks $ere volume driven7 Basel ## drives them to become risk3return driven. Once banks can attribute risk to a potential transaction, product, or process, they can ascribe a portion of economic capital to it 1based on the risk it poses2, define an expected return on it, consider ho$ best to price it, consider risk mitigating techni-ues, and thereby decide, for example, $hether to enter a transaction, engage in a business, or pursue an activity or process. Customer Impact* #mproved risk management and data flo$s should enable banks to identify target clients, evaluate their customers in a more thorough $ay than they might have done in the past, and determine $hether to retain certain customers. Banks $ill need to re-uest ne$ and timely information from borro$ers to perform the internal rating assessments and the collateral evaluation that are essential to Basel ##6s risk calculation process. The standardized credit risk approaches re-uire external rating of most borro$ers to be taken into account. Thus, external ratings agencies ac-uire ne$ importance under the Ce$ Accord. "ertain markets $ill remain accessible to un3rated borro$ers, but they are likely to face premium pricing, as lenders $ould have to set aside additional capital to cover the risks they pose. 5oreover, even un3rated borro$ers $ill find that banks are re-uired to rate them internally. Business Impact*

Although banks reduce their credit risk in their transactions, their operational risk may rise. ,or example, a bank may choose to sell a securities portfolio to a special purpose vehicle 1S+Q2 or transfer credit risk via a derivatives transaction. @hen it does so, the bank needs to designate separate people, processes, and #T systems to that S+Q and ensure proper management of related legal issues to mitigate risks. 5oreover, increased overall operational risk may re-uire higher regulatory capital, $hich partly may offset savings on the credit side. Banks may also discover that their best and>or largest customers no longer need their services. Such companies can access the capital markets directly 8 by issuing bonds, e-uity, or asset3backed securities 8 and are as likely to do so as a bank. !etaining such customers could become a challenge. lobal Impact* The banking industry6s improved risk management, enhanced information flo$s, and related disclosures could drive parallel improvements in the stability of the financial markets. Ce$ disclosures $ill provide regulators $ith ;early $arnings= that banks or rating agencies could pass on to the public and investors, potentially enhancing trust in the financial markets. ,or the individual institution, the challenge $ill be to determine ho$ to translate internal risk management into external disclosures. Scenario analysis of both credit and operational risk 8 and to $hat extent to disclose such analysis 8 becomes increasingly important for banks in an environment in $hich regulatory capital is aligned $ith economic risks. Basel ##%s disclosure re-uirements are intended to allo$ market participants to assess key pieces of information on the scope of application, capital, risk exposures, risk assessment processes, and hence the capital ade-uacy of the institution.= Such information has increased importance and potential value under Basel ##, in $hich banks have ne$ license to rely on internal models and ratings to determine their capital re-uirements. 2vervie= of Basel II implementation* !egulators in most 4urisdictions around the $orld plan to implement the ne$ Accord, but $ith $idely varying timelines and use of the varying methodologies being restricted. The various (.S. regulators have agreed on a final approach. They have re-uired the #!B approach for the largest banks and the standardized approach $ill not be available to anyone. #n #ndia, !B# has implemented the Basel ## standardized norms on HNst 5arch EBBA and is moving to internal ratings in credit and A5A norms for operational risks in banks. #n response to a -uestionnaire released by the ,inancial Stability #nstitute 1,S#2, AL national regulators indicated they $ere to implement Basel ##, in some form or another, by EBNL. The /( has already implemented the Accord via the /( "apital !e-uirements &irectives and many /uropean banks already report their capital ade-uacy ratios according to the ne$ system. All the credit institutions adopted it by EBB9. Australia, through its Australian +rudential !egulation Authority, implemented the Basel ## ,rame$ork on N Ranuary EBB9.

Introduction to IFR"

#,!S are principles3based Standards, #nterpretations and the ,rame$ork adopted by the #nternational Accounting Standards Board 1#ASB2. ,rame$ork for the +reparation and +resentation of ,inancial Statements. Originally kno$n as #nternational Accounting Standards 1#AS2 and $ere issued bet$een NADH and EBBN by #nternational Accounting Standards "ommittee 1#AS"2. On N April EBBN, the ne$ #ASB took over the responsibility for setting #nternational Accounting Standards. The ne$ Board started $ith adopting existing #AS and Standing #nterpretations "ommittee 1S#"2. 5any of the standards forming part of #,!S are kno$n by the older name of #nternational Accounting Standards 1#AS2.

"tructure of IFR"* "onsidered a ;principles based= set of standards. They establish broad rules and dictate specific treatments. IFR" comprises* o o o o o #,!S 8 standards issued after EBBN #AS 8 standards issued before EBBN #nterpretations originated from the #nternational ,inancial !eporting #nterpretations "ommittee 1#,!#"2 8 issued after EBBN S#" 8 issued before EBBN ,rame$ork for the +reparation and +resentation of ,inancial Statements

Frame=ork o o o ,rame$ork states basic principles of #,!S. #ASB and ,ASB ,rame$orks are being updated and converged. This 4oint conceptual frame$ork pro4ect, undertaken by the #ASB and the (S ,ASB,aims to update and refine the existing concepts to reflect the changes in markets, business practices and the economic environment that have occurred in the t$o or more decades since the concepts $ere first developed. #ts ob4ective is to create a sound foundation for future accounting standards that are principles3based, internally consistent and internationally converged.

!ist of IFR" specific to Banks o o o #,!S N ,irst3time Adoption of #nternational ,inancial !eporting Standards #,!S D ,inancial #nstruments &isclosures #,!S A ,inancial #nstruments

Brief on IFR" > o /ffective from N Ranuary EBBD.

o o o o o

Adds certain ne$ disclosures about financial instruments to those currently re-uired by #AS HE7 !eplaces the disclosures previously re-uired by #AS HB, and Supersedes all the disclosures in #ASHE to put together a ne$ standard on ,inancial #nstruments &isclosures. The remaining parts of #ASHE deal only $ith ,inancial #nstruments +resentation matters. The t$o main disclosures re-uired by #,!S D are #nformation about the significance of financial instruments #nformation about the nature and extent of risks arising from financial instruments #,!S D.HI to FE re-uires disclosure of nature and extent of "redit !isk, 'i-uidity !isk and 5arket !isk exposure of ,inancial #nstruments held.

Brief on IFR" @ o o o o o Applicable from N Ranuary EBNH, ho$ever early adoption is permitted. #ntroduces ne$ re-uirements for classifying and measuring financial assets. @ill eventually replace #ASHA 8 ,inancial #nstruments !ecognition and 5easurement7 !eplaces the disclosures previously re-uired by #AS HB, and #ASB expanding #,!SA during EBNB to include ne$ re-uirements for classifying and measuring financial liabilities7 credit risk in measurement of liabilities7 de3recognition of financial instruments7 impairment of financial assets measured at amortized cost7 and .edge accounting. #ASB plans to complete the replacement for #ASHA by adding above re-uirements.

!ist of IA" specific to Banks

The list is available for reference here, ho$ever a thorough reading of each #AS is part of only next level of this "ourse. o o o o #AS EL Accounting for #nvestments 8 Superseded by #AS HA and #AS FB effective EBBN #AS HB &isclosures in the ,inancial Statements of Banks and Similar ,inancial #nstitutions 8 Superseded by #,!S D effective N Ranuary EBBD #AS HE ,inancial #nstruments +resentation 8 &isclosure provisions superseded by #,!S D effective N Ranuary EBBD #AS HA ,inancial #nstruments !ecognition and 5easurement replaced by #,!S A effective N Ranuary EBNH.

!ist of Bank related interpretations by IFRIC and "IC The list is available for reference here, ho$ever a thorough reading of each #nterpretations is part of only next level of this "ourse. IA"(& , IFR" >*

o o o o

#AS HE 1EBBH2 superseded S#" L "lassification of ,inancial #nstruments 3 "ontingent Settlement +rovisions #AS HE 1EBBH2 superseded S#" NI Share "apital 3 !eac-uired O$n /-uity #nstruments 1Treasury Shares2 #AS HE 1EBBH2 superseded S#" ND /-uity 3 "osts of an /-uity Transaction #,!#" E 5embers% Shares in "o3operative /ntities and Similar #nstruments

IA" (@ , IFR" @* o o o o #,!#" NI .edge of a Cet #nvestment in a ,oreign Operation #,!#" NE Service "oncession Arrangements #,!#" A !eassessment of /mbedded &erivatives #AS HA 1EBBH2 superseded S#" HH "onsolidation and /-uity 5ethod 3 +otential Qoting !ights and Allocation of O$nership #nterest

Adoption of IFR" by region 4nited "tates

Allo$ed for foreign issuers in the (S since EBBD7 Target date for substantial convergence $ith #,!Ss is EBNN7 and &ecision about possible adoption for (S "ompanies expected EBNN.

-uropean 4nion

S All listed /( companies have been re-uired to use #,!S since EBBL. S Approved for use only $hen a #,!S standard is endorsed by Accounting !egulatory "ommittee 1A!"2. S &ue to endorsement #,!S as applied in /( may differ from that used else$here. India S The #nstitute of "hartered Accountants of #ndia 1#"A#2 made #,!S mandatory for financial statements for periods beginning N April EBNN based on company net$orth> into specific business> listed global. S /xisting accounting standards $ill be modified to make compatible $ith #,!S. S !B# has stated that financial statements for Banks must be #,!S compliant effective N April EBNN. 2ther Countries S http >>$$$.ifrs.org>(se`around`the`$orld>(se`around`the`$orld.htm IFR" Ta1onomy #t6s the OB'! representation of #,!S, including #AS and #nterpretations issued by the #ASB. The #,!S Taxonomy contains tags for all #,!S disclosures. +urpose The #,!S ,oundation seeks to address the demand for an electronic standard to transmit #,!S financial information. ,ormat Taxonomies are the computer3readable Gdictionaries6 of OB!'. Structure Taxonomies provide OB!' tags, information about each tag, and organizes tags into a meaningful structure.

!elease>Qersion On HBth April EBNB, the #,!S ,oundation released the #,!S Taxonomy for EBNB.

Introduction to "2G
S Sarbanes ) Oxley Act is a (nited States federal la$ enacted on Ruly HB, EBBE. S Also kno$n as the %+ublic "ompany Accounting !eform and #nvestor +rotection Act% 1in the Senate2 and %"orporate and Auditing Accountability and !esponsibility Act% 1in the .ouse2 and commonly called Sarbanes8Oxley. S Set ne$ or enhanced standards for all (.S. public company boards, management and public accounting firms. S #t is named after sponsors (.S. Senator +aul Sarbanes 1&35&2 and (.S. !epresentative 5ichael *. Oxley 1!3O.2. S The bill $as enacted as a reaction to a number of ma4or corporate and accounting scandals including those affecting /nron, Tyco #nternational, Adelphia, +eregrine Systems and @orld"om. These scandals, $hich cost investors billions of dollars $hen the share prices of affected companies collapsed, shook public confidence in the nation%s securities markets. S The act contains NN titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and re-uires the Securities and /xchange "ommission 1S/"2 to implement rulings on re-uirements to comply $ith the ne$ la$. S #t does not apply to privately held companies. S .arvey +itt, the EIth chairman of the Securities and /xchange "ommission 1S/"2, led the S/" in the adoption of dozens of rules to implement the Sarbanes8Oxley Act. S #t created a ne$, -uasi3public agency, the +ublic "ompany Accounting Oversight Board, or +"AOB, charged $ith overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies. S The act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure. -vents contributing to the adoption of "2G Act 0 A Case of -nron Corporation* The /nron scandal, revealed in October EBBN, eventually led to the bankruptcy of the /nron "orporation and the dissolution of Arthur Andersen, one of the five largest audit and accountancy partnerships in the $orld. "onsidered as the biggest audit failure in the $orld history. Billions of debt from failed deals and pro4ects $ere hidden through the use of accounting loopholes, special purpose entities, and poor financial reporting. ",O and other executives $ere able to mislead /nron6s Board of &irectors and Audit committee of high risk accounting issues as $ell as pressure Andersen to ignore the issues. The non transparent financial statements did not clearly detail its operations and finances $ith shareholders and analysts. #ts complex business model stretched the limits of accounting. The company used accounting limitations to manage earnings and modify the Balance Sheet to portray a favorable depiction of its performance. ,rom late NAAD until its collapse, the primary motivations of /nron6s accounting and financial transactions seem to have been to keep reported income and cash flo$ up, asset values inflated, and liabilities off the books. The combination of these issues later led to the bankruptcy of the company. The /nron scandal deeply influenced the development of ne$ regulations to improve the reliability of financial reporting, and increased public a$areness about the importance of having accounting standards that sho$ the financial reality of companies and the ob4ectivity and independence of auditing firms. One conse-uence of these events $as the passage of Sarbanes8Oxley Act in EBBE, as a result of the first admissions of fraudulent behavior made by /nron.

The act significantly raises criminal penalties for securities fraud, for destroying, altering or fabricating records in federal investigations or any scheme or attempt to defraud shareholders.

"ituation prior to adoption of "2G Act* Auditor conflicts of interest* +rior to SOO, auditing firms, the primary financial ?$atchdogs? for investors, $ere self3regulated. They also performed significant non3audit or consulting $ork for the companies they audited. 5any of these consulting agreements $ere far more lucrative than the auditing engagement. This presented at least the appearance of a conflict of interest. ,or example, challenging the company%s accounting approach might damage a client relationship, conceivably placing a significant consulting arrangement at risk, damaging the auditing firm%s bottom line. Boardroom failures* Boards of &irectors, specifically Audit "ommittees, are charged $ith establishing oversight mechanisms for financial reporting in (.S. corporations on the behalf of investors. These scandals identified Board members $ho either did not exercise their responsibilities or did not have the expertise to understand the complexities of the businesses. #n many cases, Audit "ommittee members $ere not truly independent of management. "ecurities analystsL conflicts of interest* The roles of securities analysts, $ho make buy and sell recommendations on company stocks and bonds, and investment bankers, $ho help provide companies loans or handle mergers and ac-uisitions, provide opportunities for conflicts. Similar to the auditor conflict, issuing a buy or sell recommendation on a stock $hile providing lucrative investment banking services creates at least the appearance of a conflict of interest. Inade'uate funding of the "-C* The S/" budget has steadily increased to nearly double the pre3 SOO level. #n one of his intervie$s, Sarbanes indicated that enforcement and rule3making are more effective post3SOO. Banking practices* 'ending to a firm sends signals to investors regarding the firm%s risk. #n the case of /nron, several ma4or banks provided large loans to the company $ithout understanding, or $hile ignoring, the risks of the company. #nvestors of these banks and their clients $ere hurt by such bad loans, resulting in large settlement payments by the banks. Others interpreted the $illingness of banks to lend money to the company as an indication of its health and integrity, and $ere led to invest in /nron as a result. These investors $ere hurt as $ell. Internet bubble* #nvestors had been stung in EBBB by the sharp declines in technology stocks and to a lesser extent, by declines in the overall market. "ertain mutual fund managers $ere alleged to have advocated the purchasing of particular technology stocks, $hile -uietly selling them. The losses sustained also helped create a general anger among investors. -1ecutive compensation* Stock option and bonus practices, combined $ith volatility in stock prices for even small earnings ?misses,? resulted in pressures to manage earnings. Stock options $ere not treated as compensation expense by companies, encouraging this form of compensation. @ith a large stock3based bonus at risk, managers $ere pressured to meet their targets.

"2G +andates and Re'uirements for Financial Reporting Sarbanes8Oxley contains NN titles that describe specific mandates and re-uirements for financial reporting. /ach title consists of several sections 1SOO Act2, summarized belo$. N.+ublic "ompany Accounting Oversight Board 1+"AOB2 E.Auditor #ndependence H."orporate !esponsibility F./nhanced ,inancial &isclosures L.Analyst "onflicts of #nterest I."ommission !esources and Authority D.Studies and !eports 9."orporate and "riminal ,raud Accountability

A.@hite "ollar "rime +enalty /nhancement NB."orporate Tax !eturns NN."orporate ,raud Accountability 5ey #rovisions of "2G Act* Sarbanes8Oxley Section HBE &isclosure controls Sarbanes3Oxley Section FBN &isclosures in periodic reports 1Off3balance sheet items2 Sarbanes8Oxley Section FBF Assessment of internal control Sarbanes8Oxley Section 9BE "riminal penalties for violation of SOO Sarbanes8Oxley Section NNBD "riminal penalties for retaliation against $histleblo$ers

"arbanes021ley "ection 9J9* Assessment of internal control The most contentious aspect of SOO is Section FBF, $hich re-uires management and the external auditor to report on the ade-uacy of the company%s internal control over financial reporting 1#",!2. This is the most costly aspect of the legislation for companies to implement, as documenting and testing important financial manual and automated controls re-uires enormous effort. (nder Section FBF of the Act, management is re-uired to produce an ;internal control report= as part of each annual /xchange Act report. See NL (.S.". h DEIE. The report must affirm ;the responsibility of management for establishing and maintaining an ade-uate internal control structure and procedures for financial reporting.= NL (.S.". h DEIE1a2. The report must also ;contain an assessment, as of the end of the most recent fiscal year of the "ompany, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.= To do this, managers are generally adopting an internal control frame$ork such as that described in "OSO. To help alleviate the high costs of compliance, guidance and practice have continued to evolve. The +ublic "ompany Accounting Oversight Board 1+"AOB2 approved Auditing Standard Co. L for public accounting firms on Ruly EL, EBBD. This standard superseded Auditing Standard Co. E, the initial guidance provided in EBBF. The S/" also released its interpretive guidance on Rune ED, EBBD. #t is generally consistent $ith the +"AOB%s guidance, but intended to provide guidance for management. Both management and the external auditor are responsible for performing their assessment in the context of a top3do$n risk assessment, $hich re-uires management to base both the scope of its assessment and evidence gathered on risk. This gives management $ider discretion in its assessment approach. These t$o standards together re-uire management to o Assess both the design and operating effectiveness of selected internal controls related to significant accounts and relevant assertions, in the context of material misstatement risks7 o (nderstand the flo$ of transactions, including #T aspects, sufficient enough to identify points at $hich a misstatement could arise7 o /valuate company3level 1entity3level2 controls, $hich correspond to the components of the "OSO frame$ork7 o +erform a fraud risk assessment7 o /valuate controls designed to prevent or detect fraud, including management override of controls7 o /valuate controls over the period3end financial reporting process7 o Scale the assessment based on the size and complexity of the company7 o !ely on management%s $ork based on factors such as competency, ob4ectivity, and risk7 o "onclude on the ade-uacy of internal control over financial reporting.