Housing finance in India

Housing A Macro View 1

(in million)
(Source: Census of India, 2001)

1981

1991

2001

Growth of 1991 over 1981 (%) 20.01

Growth of 2001 over 1991 (%) 18.02

Population Rural 523.87 628.70 742.00

Urban
Total Census Houses

159.46
683.33

217.60
846.30

285.00
1027.0 0

36.46
23.85

30.97
21.35

Rural
of which pucca residential stock (in %)

113.96

142.98

177.50

25.47

24.14

22.53

30.58

35.36

---

---

Housing Finance - A Key Driver for Economy

It is a basic necessity, for an individual. supports economic activities, for a family / community.

is a catalyst, for creating multiplier effect in other sectors.

is a labour intensive activity, for increasing the per capita income. is an engine of growth, for the national economy

Housing Finance - A Key Driver for Economy

Strengthens the Financial System. Leads to Investment Demand. Increases the Assets Formation. Leads to Formation of Household Physical Assets.

Serves the Social Cause.

Key to Development of Human Settlement.

Item

1995-96 to 1998-99 (Ave)

1999-00

2000-01

2001-02

2002-03

2003-04

Household Saving

17.9

20.8

21.9

22.6

23.3

24.3

a. Financial Assets

9.8

10.5

10.7

11.2

10.3

11.4

b. Physical Assets

8.1

10.3

11.2

11.4

13.0

13.0

Reasons for growth of housing finance in India

Liquidity in the System Lower Inflation Rate Softer Interest Rate Regime Housing Loan has the Lowest Non Performing Assets
(NPAs)

Fiscal Concessions Legal Reforms Wider Network - Banks/Housing Finance Companies Consumer Friendly Products/Approach Increasing number of Real Estate Developers

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

6.00%

8.00%

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Housing Finance Interest Rates in India

Months

Characteristics of housing finance

Long term finance with repayments spread over 15-20 years Most of the people prefer loan at fixed interest rate. The concept of variable interest rate is slowly picking up with the expectation of further southward movement of interest rate.

Characteristics of housing finance

Market is becoming very competitive after the entry of banks in financial institutions in retail lending. The spreads are declining the competition and unless long term funds at reasonable interest rates are made available, it would be very difficult to maintain bottomline.

Housing shortage and resource requirement

A. Housing shortage India is a vast country with a population of over 1 billion people. More than 50 million people are living in slums.

India has a current housing shortage of 22 million units (both in rural and urban areas). It will increase to 42 million by the end of 9th five-year plan.
Rural areas are still neglected, both under infrastructure and housing, resulting in shift towards urban centres.

Housing shortage and resource requirement

India is far behind Asian Countries such as Singapore, Hongkong, Malaysia, Bangkok, Korea and China in fulfilling this basic human need. These Countries made home ownership their prime objective in the early 60's, gave stimulus to the construction industry, made massive investment in physical infrastructure.

Housing shortage and resource requirement

B. Resources requirement It is difficult to make a correct assessment of requirement of resources required to meet the huge shortfall in India. But the estimated requirement of resources for meeting the existing shortfall is Rs. 150000 crores.

Bulk of these resources will come from the formal sector such as HFCs, Banks and FIs.

Housing loan market in India

The size of mortgage loan market is relatively very small compared to developed countries. Our estimated size of mortgage loans with HFCs is about Rs. 32000 crores. In developed countries like UK and USA, the outstanding mortgage loan to GDP is above 55%, Japan 33%, Korea over 10%, in Malaysia over 20% and Hongkong over 30%.

In India the ratio is just around 1.6%. After including other indirect agencies like Govt. and institutions, the percentage share will be less than 2%

Problems of long term finance in India

The mortgage loans are long term loans for 15-20 years. In some countries such as Japan these are also available for 25-30 years There are very limited options for availability of funds for such a long period and at a fixed interest rate.

Problems of long term finance in India

The long term Debt market has not so far developed or stabilised in India. Most of the institutions are suffering from asset liability mismatch and the consequences would be felt when liabilities will mature for payment.

The interest rate risk will be exposed once the interest rates start moving northwards.

What is primary and secondary market

The primary market constitutes housing loan companies (HFC s) and the borrower. The (HFC s) hold the mortgages of a borrower in their books. The participants in the secondary market are specialised institution, to whom housing loan mortgages are sold by (HFC s) at a market determined interest rate.

What is primary and secondary market

These loans are sold in the market to interested buyers in the form of mortgage backed securities (MBS). These interested buyers could be insurance companies, pension funds, mutual funds and even individuals. By this process, the avenues for funds are increased, there is a greater participation of individuals and the housing finance company is able to raise the long-term funds from the secondary market.

Mortgage loan insurance

In developed economies, the risk of default under mortgage loans is covered under an Insurance Policy for a nominal premium. As a result the Mortgage loans become risk free and only 50% risk weight is allotted on Housing Loans, which vastly improves Capital adequacy ratio. In India, in the absence of such Insurance cover, the risk of non-payment/ failure exists to a larger extent and hence the risk weight is 100%.

 Thanks to NHB, who want to introduce this Scheme by starting a separate Subsidiary. The success of this Scheme will depend on the premium rate. Indians are traditionally and emotionally attached to their own house therefore, the default ratio is low. the recovery percentage is as high as 98 to 99%. Taking this factor into consideration, RBI has now reduced the Risk weight to 75% taking into account the good asset quality.

The national housing bank (amendment) Act, 2000

The parliament passed the 'National Housing Bank (Amendment) Act, 2000' which has come into force from 16th June 2000. The need for a summary procedure was long felt for housing finance institutions for giving impetus for creation of 'Secondary Mortgage Market'.

National Housing Bank Profile

The National Housing Bank (NHB) was established on 9th July 1988 under an Act of the Parliament viz. the National Housing Bank Act, 1987 to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. The Act, inter alia, empowers NHB to:

Issue directions to housing finance institutions to ensure their growth on sound lines

National Housing Bank Profile

Make loans and advances and render any other form of financial assistance to scheduled banks and housing finance institutions or to any authority established by or under any Central, State or Provincial Act and engaged in slum improvement and Formulate schemes for the purpose of mobilization of resources and extension of credit for housing

National Housing Bank Objectives

NHB has been established to achieve, inter alia, the following objectives: a. To promote a sound, healthy, viable and cost effective housing finance system to cater to all segments of the population and to integrate the housing finance system with the overall financial system. b. To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups. c. To augment resources for the sector and canalize them for housing.

National Housing Bank Objectives

d. To make housing credit more affordable. e. To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act. f. To encourage augmentation of supply of buildable land and also building materials for housing and to upgrade the housing stock in the country. g. To encourage public agencies to emerge as facilitators and suppliers of serviced land, for housing.

National Housing Bank Business Activities

NHB, as the Apex level financial institution for the housing sector in the country, performs the following roles: (a) Promotion and Development: NHB operates as a multifunctional Development Finance Institution (DFI) for the housing sector. The Bank's policies are directed towards promotion and development of housing finance institutions. NHB has framed guidelines for HFCs with a view to promoting their development on sound and healthy lines.

The guidelines are reviewed and modified from time to time in the light of developments in the financial and housing sectors.

National Housing Bank Business Activities

All HFC s registered with the National Housing Bank u/s 29A of the National Housing Bank Act, 1987 and inter alia having minimum net owned funds of Rs.10.0 crores are eligible for refinance support. It has also contributed to the equity capital of five HFC s. NHB has a dedicated Training Division which organizes regular training programs in areas relating to housing and housing finance for development of management capabilities of officials working in the sector. NHB s promotional endeavors are also directed towards capacity building for the housing finance system besides enlarging the credit absorption capacity.

National Housing Bank Business Activities

(b) Regulation and Supervision: NHB exercises regulatory and supervisory authority over the HFC s in the matter of acceptance of deposits by them pursuant to the powers vested in it under the Act. As per the amendments to certain provisions of the Act, which came into effect from June 12, 2000, NHB is vested with powers to grant Certificate of Registration to companies for commencing/carrying on the business of a housing finance institution.

National Housing Bank Business Activities

Besides, NHB regulates the deposit acceptance activities in accordance with the Housing Finance Companies (NHB) Directions, 2001, amended from time to time, in the matter of ceiling on borrowings (including public deposits, rate of interest, period, liquid assets, etc). NHB has also issued Directions on prudential norms in regard to capital adequacy, asset classification, concentration of credit, income recognition, provisioning for bad and doubtful debts etc. NHB supervises the working of HFCs through on-site inspection and off-site surveillance.

National Housing Bank Business Activities

C. Finance NHB raises resources for the housing sector towards increasing new housing stock and provides refinance to a large set of retail lending institutions. These include scheduled commercial banks, scheduled state cooperative banks, scheduled urban cooperative banks, specialized housing finance institutions, apex cooperative housing finance societies and agriculture and rural development banks.

National Housing Bank Business Activities

Refinance is provided by NHB under various schemes, which are formulated taking into account, several aspects of the National Housing Policy, the constraints facing the sector etc. NHB has also a window for direct lending to Public Agencies such as, State Level Housing Boards and Area Development Authorities for large scale integrated housing projects and slum redevelopment projects. NHB is also operating a special window for extending financial assistance to the people affected by natural calamities viz. earthquake, cyclone etc.

National Housing Bank Business Activities

(d) Resources of NHB NHB raises resources from diversified sources, both domestic and external by issuing Bonds/ debentures, borrowing from RBI and financial institutions/organizations etc. Under the Act, NHB is authorized to issue and sell Bonds with or without the guarantee of the Central Government for the purpose of carrying on its functions.

National Housing Bank Business Activities

(e) Rural Housing: NHB launched the "Swarna Jayanti Rural Housing Finance Scheme" to mark the golden jubilee of India's Independence. The Scheme seeks to provide improved access to housing loans to borrowers for construction/acquisition/ up-gradation of a house in rural areas of the country.

National Housing Bank Business Activities

(f) Recent Initiatives Securitization of mortgage loans of the retail lending institutions facilitates for canalizing household savings into the housing sector is seen as a potentially viable market oriented alternative. Support to Mortgage backed securitization is a major policy initiative of the Government as manifested in its National Housing and Habitat Policy announced in 1998.

National Housing Bank Business Activities

This policy emphasizes NHB s lead role in mortgage-backed securitization and development of a secondary mortgage market in the country. As the apex body in housing finance sector in India, NHB has been playing a lead role in the sector in matters relating to policy environment as also operational mechanism for the development of a secondary mortgage market in India.

National Housing Bank Business Activities

In order to resolve the twin problems of affordability and accessibility affecting the growth of the housing finance business and the prospect of home ownership. NHB has been entrusted with the responsibility of launching a Mortgage Credit Guarantee Scheme for protecting the lenders against default.

Venture capital

Venture capital
In India, venture capital has been around for some time now. The performance has been mixed. The fundamental principal underlying venture capital fund is "No return without risk and greater the risk, greater the return". Venture capital is a booster for new entrepreneurs.

Venture capital
A venture capital fund is a fund, which in many ways is like mutual fund. It raises funds from several investors, who generally have a large appetite for risk and are looking out for greater returns.

Venture capital
These funds are then invested in several fledging enterprises, which need funds, but are unable to access them through the conventional sources such as banks and financial institutions. Typically, such enterprises are started by first generation entrepreneurs.

Venture capital
Since most of the ventures financed through this route are in new areas, the probability of their success is very low. The venture capitalist is however not worried because the deal, which succeeds, nets a very high return on his investments.

The return generally comes in the form of selling the stocks when they get listed on the stock exchange. If the venture fails (more often then not), the entire amount gets written off.

Venture capital
Venture capital funding may be by way of investment in the equity of the new enterprise or by way of debt or a combination of both, though equity is the most preferred route.

To conclude, a venture financier is one who funds a start up company, in most cases promoted by a first generation technocrat promoter with equity. Exit is preferably through listing on stock exchanges.

Venture capital
This method has been extremely successful in USA, and venture funds have been credited with the success of technology companies in Silicon Valley. The entire computer industry thrives on it. One can ask why venture funding is so successful in USA and has a not-so-impressive track record in India.

Venture capital
For any venture idea to succeed, there should be a product which has a growing market with a scalable business model. The IT industry (which is most suited for venture funding because of its "ideas" nature) in India till recently had a service centric business model.

Products developed for Indian markets lack scale.

Venture capital
Also, till early 90s, under the license raj regime, only commodity oriented businesses thrived in a deficit situation. To fund a cement plant, venture capital is not needed. What was needed was ability to get a license and then get the project funded by the banks and DFIs. In most cases, the promoters were well established industrial houses, with no apparent need for funds.

Venture capital funding in India

Traditionally, the role of venture capital was an extension of the developmental financial institutions like IDBI, ICICI, SIDBI, State Finance Corporations, etc.

TDICI (now ICICI ventures) and Gujarat Venture were one of the first venture capital organizations in India. Both these organizations were promoted by the financial institutions.

Venture capital funding in India

However, it was realized that the concept of venture capital funding needed to be institutionalized and regulated. Besides this funding requires different skills in assessing the proposal. Thus dedicated funds providing only venture capital funds have been formed.

The sources of these funds are normally the financial institutions or foreign institutional investors or pension funds and high net-worth individuals etc.

Venture capital funding in India

Though an attempt was also made to raise funds from the public and fund new ventures. Certain venture capital funds are industry specific (i.e. they fund enterprises only in certain industries such as pharmaceuticals, InfoTech or food processing, etc) whereas others may have a much wider spectrum.

Securities and Exchange Board of India (SEBI) has come out with guidelines to which a venture capital fund has to adhere in order to carry out its activities in India.

Venture capital funding in India

There are a number of funds which are currently operational in India and involved in funding start-up ventures. Most of them are not true venture funds as they do not fund start ups.

What they do is provide mezzanine or bridge funding and are better known as private equity players.

This article aims to give a bird-eyes view of the various guidelines a venture fund has to adhere to in India.

Venture capital funding in India

In 1973, a committee on the development of small and medium-sized enterprises highlighted the need to foster venture capital as a source of funding for new entrepreneurs and technology.

Venture capital funding in India

Later, a study was undertaken by the World Bank to examine the possibility of developing venture capital in the private sector, based on which the Indian government took a policy initiative and announced guidelines for venture capital funds (VCFs) in 1988. However, these guidelines restricted the setting up of VCFs to the banks or the financial institutions only.

Venture capital funding in India

Thereafter, some public sector funds were established but the activity of venture capital did not gather momentum as the thrust was on high-technology projects funded on a purely financial rather than a holistic basis.

Venture capital funding in India

Internationally, the trend favored venture capital being supplied by smaller-scale, entrepreneurial venture financiers willing to take a high risk in the expectation of high returns, a trend that has continued in this decade

Venture capital funding in India

In September 1995 the Indian government issued guidelines for overseas investments in venture capital in India. For tax exemption purposes, the Central Board of Direct Taxes (CBDT) issued guidelines. The flow of investments and foreign currency in and out of India has been governed by the Reserve Bank of India's (RBI) requirements. Furthermore, as part of its mandate to regulate and to develop the Indian capital markets, the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996.

Objective and vision for venture capital in India

Venture capital is very different from traditional sources of financing. Venture capitalists finance innovation and ideas, which have a potential for high growth but with inherent uncertainties. This makes it a high-risk, high-return investment. Apart from finance, venture capitalists provide networking, management and marketing support as well.

Venture capital funding in India

In the broadest sense, therefore, venture capital connotes human as well as financial capital.

In the global venture capital industry, investors and investee firms work together closely in an enabling environment that allows entrepreneurs to focus on value creating ideas

Venture capital funding in India

Venture capitalists, meanwhile, drive the industry through ownership of the levers of control in return for the provision of capital, skills, information and complementary resources. This very blend of risk financing and handholding of entrepreneurs by venture capitalists creates an environment particularly suitable for knowledge and technology-based enterprises

Venture capital funding in India

Scientific, technological and knowledge-based ideas properly supported by venture capital - can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner.

In various developed and developing economies, venture capital has played a significant developmental role. India, along with Israel, Taiwan and the US, is recognized for its globally competitive high technology and human capital.

Venture capital funding in India

India's recent success story in software and IT is almost a fairy tale when considering obstacles such as inadequate infrastructure, expensive hardware, restricted access to foreign skills and capital, and limited domestic demand. It also indicates the potential India has in terms of knowledge and technology-based industry.

Venture capital funding in India

India has the second largest English speaking scientific and technical manpower in the world. Some of its management (IIMs) and technology institutes (IITs) are known globally as centres of excellence. Every year, over 115,000 engineers graduate from government-run and private engineering colleges.

Venture capital funding in India

Many also graduate with diploma courses in computers and other technical areas. Management institutes produce 40,000 management graduates annually. All of these candidates are potential entrepreneurs.

 It is also important to recognise that while India is doing very well in IT and software, it is still behind in terms of product and packaged development. Many experts believe that just as the US did in the semiconductor industry in the eighties, it is time for India to move to a higher level in the value chain.

 This is not expected to happen automatically. The sequence of steps in the high technology value chain is information, knowledge, ideas, innovation, product development and marketing. Basically, India is still at the level of knowledge'.

 Given the limited infrastructure, low foreign investment and other transitional problems, it certainly needs policy support to move to the third stage - ie, ideas - and beyond, towards innovation and product development. This is crucial for sustainable growth and for maintaining India's competitive edge.

This will take capital and other support, which can be provided by venture capitalists.

Venture capital funding in India

India also has a vast pool of existing and ongoing scientific and technical research carried out by a large number of research laboratories, including defense laboratories as well as universities and technical institutes. A suitable venture capital environment - which includes incubation facilities - can help a great deal in identifying and actualizing some of this research into commercial production.

Venture capital funding in India

The development of a proper venture capital industry, particularly in the Indian context, is needed if high quality public offerings (IPO's) are to be achieved. In the present situation, an individual investor becomes a venture capitalist of a sort by financing new enterprises and undertaking unknown risks.

Venture capital funding in India

Investors also get enticed into public offerings of unproven and at times dubious quality. This situation can be corrected by venture-backed successful enterprises accessing the capital market. This will also protect smaller investors.

Income tax benefits

In order to encourage the development of venture capital funds, the Income Tax Act, 1961 exempts the income of a venture capital fund from income tax. Income of a Venture Capital fund [section 10(23FB)] (on and from Financial Year 1999-2000. Any income of a Venture Capital Fund ( VCF ) or a Venture Capital Company ( VCC ) set up to raise funds for investment in a Venture Capital Undertaking ( VCU ) is exempt.

Income tax benefits

VCC means a company which has been granted a certificate of registration by SEBI and which fulfils the conditions laid down by SEBI with the approval of the Central Government. VCF means a fund operating under a trust deed registered under the Registration Act, 1908, which has been granted a certificate of registration by SEBI and which fulfils the conditions laid down by SEBI with the approval of the Central Government.

MERCHANT BANKING

Definition
Merchant banking may be defined as, an institution which covers a wide range of activities such as management of customer services, portfolio management, credit syndication, acceptance credit, counselling, insurance etc.

The Notification of the Ministry of Finance defines a merchant banker as, any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management.

 A merchant banker is a financial intermediary who helps to transfer capital from those who possess it to those who need it. Merchant banking includes a wide range of activities such as management of customers securities, portfolio management, project counseling and appraisal, underwriting of shares and debentures, loan syndication, acting as banker for the refund orders, handling interest and dividend warrants etc. Thus, a merchant banker renders a host of services to corporate and merchant banker promotes industrial development in the country.

Services of merchant banks:

A merchant banker helps in the process of issue management and his services are broadly categorized as pre-issue management and post issue management. The pre-issue management involves the following: Printing prospectus Pricing of issues Marketing the issue Underwriting Listing of securities in stock exchange

 Post issue management includes the following: Collection of application forms Screening the applications Deciding allotment procedure Mailing of letter of allotment Issue of share certificates Refund of application money to nonallotters

 A merchant banker acts as a liasoning officer at the event of mergers and acquisitions. He helps the company in managing its portfolio. A merchant banker help their clients in off shore financing such as long term foreign currency loans, joint ventures abroad, licensing and franchising, financing exports and imports, foreign collaboration arrangements etc

 The services of Merchant bankers also include investment advisory to Non-Resident Indians in terms of identification of investment opportunities, selection of securities, investment management etc. They also take care of the operational details like purchase and sale of securities, securing necessary clearance from RBI.

CREDIT CARDS

 A credit card is a thin plastic card, with a magnetic strip usually 3-1/8 inches by 2-1/8 inches in size that contains identification information such as a signature or picture, and authorizes the person named on it to charge purchases or services to his account -- charges for which he will be billed periodically. Today, the information on the card is read by: automated teller machines (ATMs), store readers, and bank and Internet computers.

Who invented credit cards?

A credit card is an automatic way of offering credit to a consumer. Credit is a method of selling goods or services without the buyer having cash in hand. A credit card is only an automatic way of offering credit to a consumer. Today, every credit card carries an identifying number that speeds shopping transactions.

 Imagine what a credit purchase would be like without it, the sales person would have to record your identity, billing address, and terms of repayment. According to Encyclopedia Britannica, "the use of credit cards originated in the United States during the 1920s, when individual firms, such as oil companies and hotel chains, began issuing them to customers."

 However, references to credit cards have been made as far back as 1890 in Europe. Early credit cards involved sales directly between the merchant offering the credit and credit card, and that merchant's customer.

 Around 1938, companies started to accept each other's cards. Today, credit cards allow you to make purchases with countless third parties.

The shape of credit cards

Credit cards were not always been made of plastic. There have been credit tokens made from metal coins, metal plates, and celluloid, metal, fiber, paper, and now mostly plastic cards.

First bank credit card

The inventor of the first bank issued credit card was John Biggins of the Flatbush National Bank of Brooklyn in New York. In 1946, Biggins invented the "Charge-It" program between bank customers and local merchants. Merchants could deposit sales slips into the bank and the bank billed the customer who used the card.

Diners club credit card

In 1950, the Diners Club issued their credit card in the United States. The Diners Club credit card was invented by Diners' Club founder Frank McNamara and it was intended to pay restaurant bills. A customer could eat without cash at any restaurant that would accept Diners' Club credit cards. Diners' Club would pay the restaurant and the credit card holder would repay Diners' Club.

 The Diners Club card was at first technically a charge card rather than a credit card since the customer had to repay the entire amount when billed by Diners Club. American Express issued their first credit card in 1958.

Bank of America issued the BankAmericard (now Visa) bank credit card later in 1958.

Popularity of credit cards

Credit cards were first promoted to traveling salesmen (more common in that era) for use on the road. By the early 1960s, more companies offered credit cards, advertising them as a time-saving device rather than a form of credit.

American Express and MasterCard became huge successes overnight.

 By the mid-'70s, the U.S. Congress begin regulating the credit card industry by banning such practices as the mass mailing of active credit cards to those who had not requested them. However, not all regulations have been as consumer friendly.

 In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted restrictions on the amount of late penalty fees a credit card company could charge. Deregulation has also allowed very high interest rates to be charged.

Understanding credit cards

Credit Card A credit card is a financial instrument, which can be used more than once to borrow money or buy products and services on credit. Banks, retail stores and other businesses generally issue these. Credit limit The maximum amount of charges a cardholder may apply to the account.

 Annual fee A bank charge for use of a credit card levied each year, which ranges depending upon the type of card one possesses. Banks usually take an initial fixed amount in the first year and then a lower amount as yearly renewal fees.

Revolving Line Of Credit - An agreement to lend a specific amount to a borrower and to allow that amount to be borrowed again once it has been repaid. Most credit cards offer revolving credit.

 Personal Identification Number (PIN) - As a security measure, some cards require a number to be punched into a keypad before a transaction can be completed. The number can usually be changed by the cardholder. Teaser Rate - Often called the introductory rate, it is the below-market interest rate offered to new customers to switch credit cards.

 Joint Credit - Issued to a couple based on both of their assets, incomes and credit reports. It generally results in a higher credit limit, but makes both parties responsible for repaying the debt.

Types of cards
MasterCard Master Card is a product of MasterCard International and along with VISA are distributed by financial institutions around the world. Cardholders borrow money against a line of credit and pay it back with interest if the balance is carried over from month to month. Its products are issued by 23,000 financial institutions in 220 countries and territories. cards in circulation, whose users spent $650 billion in more than 16.2 million locations.

 VISA Card VISA cards is a product of VISA USA and along with MasterCard is distributed by financial institutions around the world. A VISA cardholder borrows money against a credit line and repays the money with interest if the balance is carried over from month to month in a revolving line of credit.

Nearly 600 million cards carry one of the VISA brands and more than 14 million locations accept VISA cards.

 Affinity Cards - A card offered by two organizations, one a lending institution, the other a non-financial group. Schools, non-profit groups, pro wrestlers, popular singers and airlines are among those featured on affinity cards. Usually, use of the card entitles holders to special discounts or deals from the non-financial group.

 Classic Card Brand name for the standard card issued by VISA. Gold Card/Executive Card A credit card that offers a higher line of credit than a standard card. Income eligibility is also higher. In addition, issuers provide extra perks or incentives to cardholders.

 Standard Card It is the most basic card offered by issuers. Platinum Card A credit card with a higher limit and additional perks than a gold card.

 Titanium Card A card with an even higher limit than a platinum card. Secured Card A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments.

It is used by people new to credit, or people trying to rebuild their poor credit ratings.

 Smart Card Smart cards, sometimes called chip cards, contain a computer chip embedded in the plastic. Where a typical credit card's magnetic stripe can hold only a few dozen characters, smart cards are now available with 16K of memory.

When read by a special terminals, the cards can perform a number of functions or access data stored in the chip.

These cards can be used as cash cards or as credit cards with a preset credit limit, or used as ID cards with stored-in passwords.

 Charge Card Falls between a debit and credit card. Works like the latter and you don't have to be an accountholder. Just pay up in full when the bill arrives with the mail. No outstanding are allowed, in other words, no revolving credit facility either. American Express and Diners are providers.

 Rebate Card This is a card that allows the customer to accumulate cash, merchandise or services based on card usage.

 Cash Card Cash cards, similar to pre-paid phone cards, contain a set amount of value, which can be read by a special cash card reader.

Participating retailers will use the reader to debit the card in increments until the value is gone.
The cards are like cash -- they have no built-in security, so if lost or stolen, they can be used by anyone.

 Travel Card These work mostly as debit cards for the limited purpose of travel. Citibank Dollar Card, American Express, Bobcard Global and Hongbank Bank Thomas Cook International Card are among the players in this section.

 Debit Card It is the accountholder's mobile ATM. Open an account with a bank that offers a debit card, and payments for purchases are deducted from your bank account. The retailer swipes the card over an electronic terminal at his outlet, you enter the personal identification number on a PIN pad and the money is immediately debited at the bank. Citibank and a few domestic banks like Times Bank offer this.

Cost implications for the banks

Credit card issuers (banks) have several types of costs: Interest Expenses. Banks generally borrow the money that they then lend to their customers. As they receive very low-interest loans from other firms, they may borrow as much as their customers require, while lending their capital to other borrowers at higher rates.

If the card issuer charges 15% on money lent to users, and pays 5% on that same amount, they are essentially making 10% on the loan. This 5% difference is the "interest expense."

 Operating Costs. This is the cost of running the credit card portfolio, including everything from paying the executives who run the company and their secretaries to printing the plastics to mailing the statements to running the computers that keep track of every cardholder's balance to taking the many phone calls which cardholders place to their issuer to tracking down fraud rings to protect the customers. The expenses involved in taking phone calls from customers are usually the greatest of these categories.

 Charge Offs. Some customers never pay their credit card bill.

In any given year, anywhere from 4% to 9% of the money that a bank lends to its credit card customers will never be repaid. Some credit card issuers have had various troubles and seen this number rise to over 20%. As this number climbs or becomes erratic, officials from the Federal Reserve take a close look at the finances of the bank and may impose various operating strictures on the bank, and in the most extreme cases, may close the bank entirely.

 Rewards Costs. Many credit card customers receive rewards, such as airline miles or cash back, as an incentive to use the card. Rewards are generally tied to spending money on the card, which may or may not include balance transfers, cash advances, or other special uses.

These rewards rarely cost credit card issuers less than 0.25% or more than 2%, and in fact will usually run in the 0.5% to 1% range, as a percentage of purchases.

 Fraud costs.

Where a card is stolen, or an unauthorized duplicate made, a most card issuers will refund some or all of the charges that the customer would have otherwise received, for things they didn't buy.

These refunds will in some cases be at the expense of the merchant, especially in mail order cases where the merchant cannot claim sight of the card, but in other cases, these costs must be borne by the card issuer.

The cost of fraud is high; in the UK in 2004 it was over 500 million.

Offsetting those costs are the following revenues: Interchange fees. Interchange fees are charged by the merchant's acquirer to a cardaccepting merchant as component of the so-called merchant discount fee.

The merchant pays a merchant discount fee that is typically 2 to 3 percent (this is negotiated, but will vary not only from merchant to merchant, but also from card to card, with business cards and rewards cards generally costing the merchants more to process), which is why some merchants prefer cash, debit cards, or even checks. The majority of this fee, called the interchange fee, goes to the issuing bank, but parts of it go to the processing network, the card brand (American Express, Visa, MasterCard, etc.), and the merchant's acquirer.

 The interchange fee that applies to a particular merchant is a function of many variables including the type of merchant, the merchant's average ticket dollar amount, whether the cards are physically present, if the card's magnetic stripe is read or if the transaction is hand-keyed, the specific type of card, when the transaction is settled, the authorized and settled transaction amounts, etc. For a typical credit card issuer, interchange fee revenues may represent about fifteen percent of total revenues, but this will vary greatly with the type of customers represented in their portfolio. Customers who carry high balances will have low interchange revenues, while customers who use their cards for business and spend hundreds of thousands of dollars a year on their cards will have very healthy interchange revenues.

 Charging interest on outstanding balances. Customers who do not pay in full the amount owed on their monthly statement (the "balance") by the due date (that is, at the end of the "grace period") owe interest ("finance charges"). These customers are known in the industry as "revolvers". Those who pay in full (pay the entire balance) do not. These customers are known in the industry as "transactors" or "convenience users".

Interest charges vary widely from card issuer to card issuer.

Fees charged to customers. The major fees are for: (1) late payments; (2) charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake); (3) Returned check fees or payment processing fees (eg phone payment fee); (4) cash advances and convenience checks (often 3 percent of the amount);

 (5) transactions in a foreign currency (as much as 3 percent of the amount; a few financial institutions charge no fee for this -- it is worth noting as an aside that the credit card issuer charges a fee on top of the international bank rate when converting currency, which in most circumstances is a better rate than is available elsewhere, even with the fee added on); and

(6) membership fees (annual or monthly), sometimes a percentage of the credit limit.