Banker Times - 08 Dec 2014 - RJ - Cash to Card

Holding electronic payments hostage

Came across a interesting article in Live mint by Saurabh Tripathi. Below is a gist of the same

The number of ATMs in India has grown very rapidly from 3,000 in 2001 to 160,000 in 2014 at a compound annual growth rate (CAGR) of 36% and it is still growing. Today any bank customer can use ATM of any other bank. As soon as cash is paid out, account of the customer is debited in real time. Customer gets a reassuring instant SMS intimation. 25% of bank account holders are active users of their debit cards at the ATMs. A vibrant vendor industry has evolved to help banks rapidly set up and maintain ATMs. This happened because the network connecting ATMs of all banks in the country was designed elegantly. It ensures everyone in the system is economically sustainable and viable. The Reserve Bank of India (RBI) has intervened several times with very strong measures.

But the good news stops here. The same debit card that is used at the ATM can also be used to pay electronically at merchant shops by swiping the card on the Point of Sale (POS) device. However, in the last financial year i.e., 2013-14, in comparison to the 5 billion ATM cash withdrawal transactions, there were only 620 million debit card transactions on POS devices. As a result, compared to Rs.20 trillion cash withdrawn from ATMs, only R1 trillion was actually spent directly at merchant terminals through debit cards. All this is despite the fact that we have only 160,000 ATMs as against 110,000 POS machines. Understandably, the banks, which set up POS machines, do not find them viable. Consequently we have the lowest number of POS machines among all comparable economies.

This is surprising because there is a big win-win opportunity for all concerned in electronic transactions at merchant outlets. The customer does not have to take out cash from ATM before spending. The merchant does not have to handle cash and go to bank branch to deposit cash. The bank saves cost with fewer ATM transactions and, as a subtle (and not fully appreciated) side benefit, enjoys larger float in customer account for a longer time.

At the heart of this colossal failure is poorly designed interbank scheme, which makes it unviable for banks to set up POS units. Just contrasting the scheme of ATMs with that of POS machines is enough to spot the issue. When a customer of Bank A uses her debit card to withdraw money from ATM of Bank B, Bank A compensates Bank B. Bank B has spent money to set up the ATM and to maintain it. Bank A customer is enjoying the benefit. So Bank A pays. Now look at the absurdity of a similar transaction on a POS device. When a customer of Bank A uses her debit card to make a POS transaction at a merchant where the POS device is installed and maintained by Bank B, Bank B effectively makes a net payout to Bank A under the current arrangement. Bank B charges the merchant some money for each such transaction. This is called Merchant Discount Rate (MDR) and has recently been reduced by RBI to 0.75% for transactions upto Rs.2,000 and 1% for transaction value of more than Rs.2,000. Merchants feel uncomfortable having to pay this. They try to avoid taking payment electronically because cash is better for them. Most banks which set up POS machines (like Bank B in the example) make a loss on the business of setting up and maintaining POS machines. So, most banks are going very slow in setting up new POS machines. The situation is absurd since Bank A saves a lot of money when its customers use debit card at POS in form of avoided ATM transaction cost and higher balances in savings account.

The interbank scheme for ATMs is innovative. It is designed for India’s needs. It has an air of frugal innovation about it. It gets the economics right. Results are for all to see. The debit card scheme for POS transactions is out of sync with underlying economics. Its basic architecture is borrowed from the interbank schemes for credit card transactions. The banking industry is paying a huge price in the form of high cost ATM transactions when so much more of customer spending could have been cashless. The scheme for debit cards payment on POS devices should be along the lines of the scheme for ATMs. The Reserve Bank should make a more concerted effort for a fundamental redesign of the system. Bank CEOs should come together to change the state of affairs in their own interest.

http://www.livemint.com/Opinion/p3YRSXO2FjL8A6eLFeiygI/Holding-electronic-payments-hostage.html

This also explains why in many developed countries all payments are made in cards and cash is sparsely used. In fact most small purchases are made through cards. In India however the situation is exactly reverse and card payments is generally used only for large purchases. Also  the smaller merchants insist on a minimum transaction of say Rs 200 to accept cards or charge 2%  extra for the same thus effectively passing on the charges to customer.

Some statistics :

A large scale card based transactions has the potential to reduce the number of ATM transactions and also the perpetual issue of shortage small denominations(Chutta nai hai).

According to MasterCard, 75% of all card payments are concentrated in the top 20 cities with Delhi, Mumbai and their suburbs alone accounting for 43%.

Credit cards have a higher share in the discretionary category whereas debit cards dominate in routine expenses like utility payments.

About 30% of credit card spends are being done online. At least 10-15% of customers use their cards only online, many from smaller cities.

A Visa study reveals that people in the monthly income band of Rs 75,000-100,000 are the most prolific users of electronic cards.

Electronic payments dominate their expenses: rail/airfare (71%), durable goods (61%), rent (49%), tele/mobile (47%), medical institutions (46%), clothing/footwear (44%), beverage and refreshments (35%).

(source Economic times : Rise in credit & debit cards spending signals India's transformation into a cashless economy Malini Goyal, ET Bureau Oct 6, 2013)

So there is a huge potential for growth in non cash payments if only we are able to make it into a win-win situation for all.

Banker Times - 06 Dec 2014 - RJ - Gist of Draft CRS/FATCA

Gist of Draft CRS/FATCA Rules Version 3

Source : Draft  from first meeting between IBA & CBDT

1. Statement of reportable account is to be filed by 31 may of every year for the previous year starting 31 may 2015
2. The report is to be furnished to the Director of Income tax ( intelligence). The report has to be uploaded in a online system using a digital signature.
3. The details of report will be specified by the IT dept in due course
4. Details about the following type of accounts
   1. Depository accounts
   2. Custodial accounts
   3. Equity Or debt interests in an investment entity
5. Refer Definition of Financial accounts and other definitions on page 2 – 6
6. Refer Nature of Information to be maintained and reported on page 7-9
7. Rule 114 H : Reporting rules – what accounts are to be reported -9

Definition of Financial accounts

1. Depository accounts : "depository account" means any account maintained by a financial institution in the ordinary course of a banking or similar business and includes an amount held by an insurance company pursuant to a guaranteed investment contract or similar agreement to pay or credit interest thereon.
   1. CASA, TD CCOD,and all accounts wherever depository functions can be carried out will be included in this definition.
   2. Credit cards to be included
   3. Prepaid cards to be included
   4. Escrow accounts to be included
   5. Term loans ,consumer finance, LAS to be excluded< to be checked>.
2. Custodial Account: "custodial account" means an account (other than an insurance contract or annuity contract) for the benefit of another person that holds one or more financial assets.

Type of account	Desc	Owner of the acct for FATCA
Securities account	Accounts of the customers to which securities are posted	Bank as a custodian
Collateral on derivative transactions	Collateral held in the form of cash or securities in a collateral acct by a bank pursuant to a derivative contract	The bank which is acting as a custodian of the cash/securities
Inhouse custodial account	An internal account held by the entity in its name	EXCLUDED. Not a financial account

3. Equity /Debit interests : "equity interest" in a financial institution, being,-

1. a partnership means either a capital or profits interest in the partnership;
2. a trust means any interest held by any person treated as a settlor or beneficiary of all or a portion of the trust, or any other natural person exercising ultimate effective control over the trust.

Explanation.- A person will be treated as being a beneficiary of a trust if he has the right to receive directly or indirectly a mandatory distribution or may receive, directly or indirectly, a discretionary distribution from the trust.

Type of account	Desc	Considered as financial account?	Owner of the acct for FATCA
Listed wholesale debt notes	Unsecured debt instruments issued by a bank.	These are considered to be financial accounts only if these are not regularly traded<exact definition of regularly traded needed> or value is not determined wrt a asset giving rise to a withholdable payment.	The issuer of the instrument
Unlisted debt instruments – Commercial paper/Bill	An unsecured short term debt instrument issued by bank custodian , investment entity,	These are considered to be financial accounts only if value is determined wrt a asset giving rise to a withholdable payment.	The issuer of the instrument
Bonds/Promissory note	Issued by a bank	Same as above	The issuer of the instrument
Securitisations(UNLISTED)	Bonds or note or equity instruments issued by a SPV	YES	SPV that issues the instrument
Derivatives	All variations of derivatives including swaps, forwards, futures, options, interest rates, foreign currency equities.	TO BE CHECKED
Repo		TO BE CHECKED

4. Excluded accounts : This means a retirement or a pension account which satisfies the following requirement :

1. Retirement plans :

1. The accounts is subject to regulation as a personal retirement acct or is a part of regd regulated retirement plan. For provision of retirement benefits.
2. Accounts is tax favoured i.e contributions to the account are deductible, or taxed at reduced rate or taxation of invt income is deferred or taxed at reduced rate.(TAX FDs)
3. Reporting is required to be done to IT wrt to these accounts
4. Withdrawls are only related to a specific age , death or disability or penalties apply when withdrawals are made
5. Either annual contributions are limited to 30 lakh rupees or there is maximum life time contribution to the extent of 6 crores

2. Any account that satisfies the following requirements

1. The account is subject to regulation as an investment vehicle for purposes other than for retirement and is regularly traded on an established securities market, or the account is subject to regulation as a savings vehicle for purposes other than for retirement; Mutual fund units , Recurring deposits ?
2. the account is tax-favoured where contributions to the account that would otherwise be subject to tax are deductible or excluded from the total income of the account holder or taxed at a reduced rate, or taxation of investment income from the account is deferred or taxed at a reduced rate;
3. withdrawals are conditioned on meeting specific criteria related to the purpose of the investment or savings account (for example, the provision of educational or medical benefits), or penalties apply to withdrawals made before such criteria are met; and
4. annual contributions are limited to an amount equivalent to thirty lakh rupees or less, applying the rules prescribed in clause (C) of sub-rule (7) of rule 114H for account aggregation and currency translation.

3. An account established in India under the Senior Citizens Saving Scheme of 2004 to provide Indian senior citizens and saving schemes and savings and deposits account.
4. an account that is held solely by an estate if the documentation for such account includes a copy of the deceased's will or death certificate(deceased accounts).
5. An account established in connection with any of the following:

1. a court order or judgment.Court Deposits
2. a sale, exchange, or lease of real or personal property,(EMD for property transactions , or escrow for property transactions)

6. In the case of an account other than a U.S. reportable account<WHAT IT MEANS IS A NON US PERSON >, a depository account that satisfies the following requirements, namely:-

1. the account exists solely because a customer makes a payment in excess of a balance due with respect to a credit card or other revolving credit facility and the overpayment is not immediately returned to the customer; and
2. beginning on or before [xx/xx/xxxx], the financial institution implements policies and procedures either to prevent a customer from making an overpayment in excess of thirty lakh rupees, or to ensure that any customer overpayment in excess of thirty lakh rupees is refunded to the customer within 60 days, in each case applying the rules prescribed in clause (C) of sub-rule (7) of rule 114H for account aggregation and currency translation. For this purpose, a customer overpayment does not refer to credit balances to the extent of disputed charges but does include credit balances resulting from merchandise returns.

7. any other account that presents a low risk of being used to evade tax, has substantially similar characteristics to any of the accounts described in sub-clauses (i) to (vi), and is defined in under any other Act as an excluded account

Other Definitions to be noted :

Financial assets

Financial institution

Non-reporting financial institution

U.S. Reportable Account" means a financial account maintained by a reporting financial institution and, pursuant to the due diligence procedures prescribed in rule 114H, is identified to be held by one or more specified U.S. persons or by a Non-U.S. entity with one or more controlling persons that is a specified U.S. Person

Controlling person : means the natural persons who exercise control over an entity and includes a beneficial owner as defined in Explanation to sub-rule (1A) of rule 9 of Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005.

Explanation 1.- In determining the beneficial owner the procedure specified in the following Circular shall be applied, namely:-

35. DBOD.AML.BC. No.71/14.01.001/2012-13 issued on 18^th January, 2013 by the Reserve Bank of India;

(ii) CIR/MIRSD/2/2013 issued on 24^th January, 2013 by the Securities and Exchange Board of India.

In the case of a trust, such term means the settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust, and in the case of a legal arrangement other than a trust, such term means persons in equivalent or similar positions

Related Entity : an entity is a "related entity" of another entity if either entity controls the other entity, or the two entities are under common control.

Explanation.- For the purpose of this clause control includes direct or indirect ownership of more than fifty per cent of the vote and value in an entity.

A citizen of United States of America is a resident of United States of America under the tax laws of United States of America.

Nature of Information to be maintained and reported

Rule 114G : The following information shall be maintained and reported by a reporting financial institution in respect of each reportable account

A) The name, address, taxpayer identification number date and place of birth

B) In the case of any entity :

i) the name and address of the entity, taxpayer identification number assigned to the entity by the jurisdiction of its residence; and

ii) The name, address, date and place of birth of each such controlling person and taxpayer identification number assigned to such controlling person by the jurisdiction of his residence;

This would require us to capture the TAX id of all foreign nationals and not only US persons. This would require a mandating of PAN field for all foreign nationals

C) the account number (or functional equivalent in the absence of an account number);

D) the account balance or value for the specified period as per the specified calculation

E) In the case of any custodial account:

(i) the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during each of the four quarters of the relevant calendar year; and

(ii) the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during each of the four quarters of the relevant calendar year with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder;( for reportable wealth customer However it needs to be checked if merely receiving credits in accounts makes a bank a custodian)

F) In the case of any depository account, the total gross amount of interest paid or credited to the account during each of the four quarters of the relevant calendar year;

G) In the case of any account not described in clauses (E) or (F), the total gross amount paid or credited to the account holder with respect to the account during each of the four quarters of the relevant calendar year with respect to which the reporting financial institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the account holder during each of the four quarters of the relevant calendar year; and(NOT CLEAR)

H) Accounts held and payments made to non-participating financial institutions,

Provided that the information to be reported,-

1. with respect calendar year 2014, is the information of U.S. reportable accounts and that is prescribed in clauses (A), (B), (C) and (D);
2. with respect calendar year 2015, is the information of U.S. reportable accounts and that is prescribed in clauses (A), (B), (C), (D), (F), (G), (H) and sub-clause (i) of clause (E);
3. with respect to calendar year 2016, is the information of all reportable accounts and that is prescribed in clauses (A) to (H),
4. with respect to calendar year 2017 and subsequent years, is the information of all reportable accounts and that is prescribed in clauses (A) to (G).

Provided further that with respect to each U.S. reportable account that is maintained by a reporting financial institution as of June 30, 2014, the taxpayer identification number of any relevant person is not required to be reported if such taxpayer identification number is not in the records of the reporting financial institution.

Definitions & notes

Where the person is a resident of more than one jurisdiction outside India under the tax laws of such jurisdiction the reporting financial institution shall maintain the taxpayer identification number in respect of each such jurisdiction. So a dual citizen ship person both US TIN and Indian PAN have to be captured

Notwithstanding anything contained in sub-rule (1), with respect to each reportable account that is a preexisting account, the taxpayer identification number or date of birth is not required to be reported if such taxpayer identification number or date of birth is not in the records of the reporting financial institution and is not otherwise required to be collected by such reporting financial institution under domestic law:

Provided that the reporting financial institution is required to use reasonable efforts to obtain the taxpayer identification number and date of birth with respect to preexisting accounts by the end of the second calendar year following the year in which such accounts were identified as reportable accounts.

Notwithstanding anything contained in sub-rule (1), the place of birth is not required to be reported unless the Reporting Financial Institution is otherwise required to obtain and report it under domestic law and it is available in the electronically searchable data maintained by the Reporting Financial Institution.

Rule 114 H : Reporting rules – what accounts are to be reported

1) An account is treated as a reportable account from the date it is identified as such. Information with respect to a reportable account must be reported annually in the calendar year following the year to which the information relates.

2) For the purpose of this rule,-

(A) "preexisting account" means a financial account maintained by a reporting financial institution as of,

(i) in case of a U.S. reportable account, 30 June, 2014; and

(ii) in case of other reportable account, 31 December 2015.

B) New account means a accounts opened on or after 1 july 2014( for US reportable account). For other reportable accounts date is 31 dec 2015.

(F) "lower value account" means a preexisting individual account with a balance or value that,-

(i) in case of a U.S. reportable account, exceeds thirty lakh rupees but does not exceed six crore rupees as of 30 June, 2014; and

(ii) in case of other reportable account, does not exceed six crore rupees as of 31 December 2015.

(G) "high value account" means a preexisting individual account with a balance or value that,-

(i) in case of a U.S. reportable account, exceeds six crore rupees as of 30 June, 2014 or 31 December of any subsequent year; and

(ii) in case of other reportable account, exceeds six crore rupees as of 31 December 2015 or 31 December of any subsequent year.

(H) "new entity account" means a new account held by one or more Entities.

3. Method for identifying reportable accounts. This rule lays down guidelines/due diligence for identifying reportable accounts from various categories of accounts

Prexisting individual accounts

New individual accounts

Preexisting entity accounts

Nonparticipating financial institutions among new entity accounts

Banker Times - 04 Dec 2014 - RJ - Monetary Policy highlights

Highlights of the Fifth bi monthly monetary policy statement – RBI

 

 

1.       Monetary and Liquidity Measures

 

Repo rate under the liquidity adjustment facility (LAF)	Unchanged at 8.0 per cent
Cash reserve ratio (CRR) of scheduled banks	Unchanged at 4.0 per cent of net demand and time liabilities (NDTL)
Will continue to provide liquidity through . -          Overnight repos  @ 0.25 per cent of bank wise NDTL -          7 day /14 day term repos upto 0.75 percent of NDTL through auctions	@ LAF repo rate
Reverse repo rate under the LAPF	Unchanged at 7.0 per cent
Marginal standing facility (MSF) rate and the bank Rate	9 per cent

 

               

                Glossary :

 

Liquidity adjustment facility (LAF)

 

Is a monetary policy tool which allows banks to borrow money through repurchase agreements.LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo operations. Repo or repurchase option is a collaterised lending i.e. banks borrow money from Reserve bank of India to meet short term needs by selling securities to RBI with an agreement to repurchase the same at predetermined rate and date.

The rate charged by RBI for this transaction is called the repo rate. Repo operations therefore inject liquidity into the system. Reverse repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI is in this case is called the reverse repo rate. Reverse repo operation therefore absorbs the liquidity in the system. The collateral used for repo and reverse repo operations are Government of India securities. Oil bonds have been also suggested to be included as collateral for Liquidity adjustment facility.

 

Liquidity adjustment facility has emerged as the principal operating instrument for modulating short term liquidity in the economy. Repo rate has become the key policy rate which signals the monetary policy stance of the economy.

REPO PERIOD

2.18. Repo period could be overnight term, open or flexible. Overnight repos lasts only one day. If the period is fixed and agreed in advance, it is a term repo where either party may call for the repo to be terminated at any time although requiring one or two days' notice. Though there is no restriction on the maximum period for which repos can be undertaken generally term repos are for an average period of one week. In an open repo there is no such fixed maturity period and the interest rate would change from day to day depending on the money market conditions. In such cases the lender agrees to provide money for an indefinite period and the agreement can be terminated on any day. Under flexible repos the lender places funds, but they are withdrawn by the borrower as per his requirements over an agreed period.

MSF & LAF : Difference between liquidity adjustment facility-repo rate and marginal standing facility rate of RBI : Under LAF - Repo rate, Banks can borrow from RBI at the Repo -rate  by pledging government securities over and above the statutory liquidity requirements. However, in case of borrowing from the marginal standing facility, banks can borrow funds up to two percentage of their net demand and time liabilities, at the rates announced by RBI and this can be within the statutory liquidity ratio of 23%. The rate of interest payable by banks is less in case of Repo facility than the borrowing availed under MSF i.e. we can say MSF borrowing is costlier for the banks than the borrowing under Repo Rate.

2.      Assessment of the Global Economy

Favorable indicators

Sharp fall in crude prices       

            Recovery in the United States is broadening on the back of stronger domestic consumption, rising investment and industrial activity.

Unfavorable indicators

Euro area : Recessionary forces continue to weaken industrial production and investment sentiment.

Japan : Growth may be picking up again on the back of stronger exports, helped in part by further quantitative and qualitative easing

China : Disappointing activity and still-low inflation have prompted rate cuts by the People’s Bank of China.

Other major emerging market economies (EMEs) : Downside risks to growth from elevated inflation, low commodity prices, deteriorating labour market conditions and stalling domestic demand

3.      Assessment of the Indian Economy

Domestic activity weakened in Q2 of 2014-15, and activity is likely to be muted in Q3 also because of a moderate kharif harvest.

Mfg Sector : Despite the uptick in September, the growth of industrial production slumped to 1.1 per cent in Q2 with negative momentum in September.The persisting contraction in the production of both capital goods and consumer goods in Q2 reflected weak aggregate domestic demand.However, more recent readings of core sector activity, automobile sales and purchasing managers’ indices suggest improvement in likely activity.Exports have buffered the slowdown in industrial activity in Q2 but, going forward, require support

            Services Sector : Purchasing managers’ survey indicates deceleration in new business. Tourist arrivals and domestic and international cargo movements have shown improvement.

            Investments : While low capacity utilization in some sectors is a dampener, the recent strong improvement in business confidence and in investment intentions should help.

Govt finances: The fiscal outlook should brighten because of the fall in crude prices, but weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets.

Retail Inflation : consumer price index (CPI), has decelerated sharply since the fourth bi-monthly statement of September. Protein-rich items such as milk and pulses continue to experience upside pressures, reflecting structural mismatches in supply and demand.

Non Food Non fuel inflation : Softening of international crude prices in October eased price pressures in transport and communication .Upside pressures persist in respect of prices of clothing and bedding, housing and other miscellaneous services, resulting in non-food non-fuel inflation for October remaining flat at its level in the previous month, and above headline inflation.

4.      Policy Stance and Rationale : Headline inflation has been receding steadily and current readings are below the January 2015 target of 8 per cent as well as the January 2016 target of 6 per cent. The inflation reading for November – which will become available by mid-December – is expected to show a further softening. Thereafter, however, the favourable base effect(when the inflation % are calculated using a base year then  if the inflation in that year  is abnormally high then all subsequent calculation will show a falling inflation rate) that is driving down headline inflation will likely dissipate and inflation for December (data release in mid-January) may well rise above current levels.

 

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Banker Times - 3 Dec 2014 - RJ - TReDing the Factoring market

Guidelines for setting up of and operating the Trade Receivables Discounting System (TReDS) - Gist

RBI today issued guidelines for setting up of TReDS. The objective here as stated is to create a primary and secondary factoring market to enable MSMEs(Micro Small and medium enterprises) to monetize their receivables. Simply put if A ltd has sold some goods to BHEL and payment is expected to be received after 30  days A ltd can sell its receivable from BHEL at a discount and get money upfront. This will help the MSMEs in managing their liquidity in a better way.

Before we go into details some definitions are important a) Financiers : The entity who is buying the factoring unit b) buyer : The entity who has purchased goods from the MSME seller and is obligated to pay for the same on the due date. C) Sellers are the MSME sellers

MSME sellers, corporate and other buyers, including the Government Departments and PSUs, and financiers (both banks and NBFC factors) will be direct participants in the TReDS. The TReDS will provide the platform to bring these participants together for facilitating uploading, accepting, discounting, trading and settlement of the invoices / bills of MSMEs. The bankers of sellers and buyers may be provided access to the system, where necessary, for obtaining information on the portfolio of discounted invoices / bills of respective clients. The TReDS may tie up with necessary technology providers, system integrators and entities providing dematerialisation services for providing its services

In the first phase only direct discounting will be enabled and in the second phase rediscounting of the factoring units  will also be enabled.

The dematerialization route has been opted for with a demat account like structure. Thus instead of shares/Debt  , here , the receivables are converted into tradable units called "Factoring unit" by entrering the details on the TReDs system. Each such unit will be listed on the system and the financiers can view the same and put in bids for such units , the sellers can check the bids and can accept it in the system. TReDS will handle the settlement for both the Financiers and the sellers. The creating of a factoring unit will involve creating a unit in TReDS system   by the MSME seller which will flow to the buyer for acceptance. It will provide factoring as well as reverse factoring services.

The settlements will also be similar to stock exchange settlements with flexible due dates.

For  this purpose there is no differentiation between Invoice or bill of exchange and both will be treated as a factoring unit. Each such unit will have the same sanctity and enforceability as allowed for physical instruments under the "Factoring Regulation Act, 2011" or under the "Negotiable Instruments Act, 1881.

These instruments may also  be rated by the TReDS on the basis of external rating of the buyer, its credit history, the nature of the underlying instrument (invoice or bill of exchange), previous instances of delays or defaults by the buyer with respect to transactions on TReDS, etc.

For Details refer

http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2904#ANN

It would be interesting to see,  which entity  throws its hat into the ring first

Some criticisms

1.     Why Should this be restricted to only transactions between MSME & large corporate? Why not allow all types of transactions i.e large corp to large corp , MSME to MSME etc . This will help in increasing volumes

2.     Clarity needed on whether it includes service providers also. Considering that services accounts for a large % of our GDP this segment cannot be excluded

Banker Times - 3 Dec 2014 - RJ - The Unions Strike Back

Bank strikes hit transactions worth Rs 1.75 lakh cr in 6 southern states

Around 25 million cheques worth Rs 1.75 lakh crore are reportedly held up for clearance due to the zonal strikes called by the United Forum of Bank Union (UFBU) and National Union of Bank Employees.
C H Venkatachalam, general secretary, All India Bank Employees Association (AIBEA) said that about 150,000 employees, officers and managers have participated in the strike in about 23,000 branches across Tamil Nadu, Kerala, Andhra Pradesh, Telegana, Puducherry and Andaman & Nicobar.
The strike is to demand early conclusion of the wage revision settlement for the bank staff which is due from November 2012.

Banker Times - 3 Dec 2014 - RJ - ZAMINDAR Banks

ZAMINDAR Banks - Banks also charge the poor high interest rates

KOLKATA: When it comes to lending to the poor, it's not just the micro finance institutions (MFIs) that charge high interest rates, but also bulge-bracket banks such as Axis BankBSE 1.35 % and YES Bank, which charge as much as 22-26% a year. This is the trend that has emerged after the Reserve Bank of India (RBI) allowed banks to engage microfinance institutions (MFIs) as business correspondents in June this year. Banks have access to low cost deposits, unlike MFIs, giving
the giving them access to lower cost of funds, but that does not translate into lower lending rates. In reality, private banks charge as much as micro lenders such as Bandhan Financial Services or SKS Microfinance do.

Read more at:

http://economictimes.indiatimes.com/articleshow/45354900.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Banker Times - 3 Dec 2014 - RJ - Deposit rates may fall, lock in those FDs now

Banking industry lobby group Indian Banks' Association (IBA) today said the interest rates on deposits are expected to fall further in this quarter on surplus liquidity and weak demand for credit.

"With sufficient liquidity and not much demand for bank credit, after the fourth bi-monthly policy statement, many banks have reduced their deposit rates. This trend is quite likely to continue in this quarter also", T M Bhasin, Chairman, IBA & Chairman & Managing Director Indian Bank, said in statement.

Though banks have not reduced lending rate as such after the fourth bi-monthly policy, many have reduced the spread in their retail portfolios.  

Reserve Bank of India in its fifth monetary policy review said indicated that the revival of investment demand depends on the removal of the constraints in the infrastructure sector. This is quite significant for the banking industry because, commercial banks are the second largest source of finance for infrastructure in the country, IBA added.

RBI's policy kept the repo rate unchanged indicating no change in the policy stance for the time being. Though a rate cut would have cheered the Industry, RBI decided to wait for clear and sustainable trend from the inflation front as well as from the fiscal front. For the banks, low credit growth is a cause of concern.

Banker Times - 2 Nov 2014 - RJ

The Rate Cuts

The Reserve Bank of India will shift to a system of announcing its policy statement bi-monthly with the first such policy being announced on April 1, 2014. Bankers widely expect RBI to hold on to rates given that pressure on inflation is easing and the rupee has also been firming up.Until the mid-90s, RBI had only two monetary policy reviews a year.After Bimal Jalan took charge as governor in 1997, he rechristened the process as monetary policy and introduced quarterly reviews. His successor Y V Reddy introduced a mid-quarter review, which resulted in an announcement every 45 days. And now it is bi monthly.

So this bimonthly review expectation is that RBI will cut rates. All kinds of arguments were being put forth. However it seems Mr Raghuram Rajan has stuck to his guns and to his target of finishing inflation once and for all.

Let us see how a rate change impacts the economy. The rate that is being talked about here is the rate at which RBI lends money to the banks. This sets the tone for interest rates of all the downstream, borrowings including HOME EMIs. So when RBI cuts the rate it reduces the cost of funds for the banks , which they may or may not pass it on to consumers by way of decreased loan rates.

Generally rate cuts are carried out for releasing liquidity into the economy, which is supposed to give a boost to the economic activity in the country. However spurt in economic activity like ,

fresh investments etc are not only a factor of liquidity but also macro-economic sentiments. A rate cut combined with big bang reforms will surely revive the investor and business sentiment. However it’s quite unlikely that only a rate cut will help in any way. There is a flip side to releasing more liquidity into the economy , it leads to inflation and that inflation impacts every person in the country. When prices of Food items rise the poor are the most affected and the impact is quite instant. While the positive spin off of rate cuts by way of increased economic activity, jobs etc have a inherent gestation period.

So Mr Rajan  is being cautious and rightly so.

Ponderings on payments and Small Financing banks

Will the competition now intensify ,for garnering CASA, with the arrival of the small and payments banks ?

Will they be competitors or will banks themselves will form JVs or invest in them  or be promoters of such banks?

Will financial products now reach to remote corners of India since these banks have been allowed to sell the safe financial products like Insurance and Mutual Funds?

Will existing players in the payments sector like Prepaid instrument issuers etc see this opportunity and jump in ?

Will we be able to have bank account with lesser/Nil QAB? And not pay charges to withdraw our own money?

The future in this regard will be exciting to watch. Often , very few of us can imagine the way the things evolve given the great environment by way of technology  etc. All we know is that a there is a bulk  of unbanked customers who want banking services and on supply side we have commercial banks who are not able to provide the same at the cost at which the bulk of customers can afford. This gap may be filled in by such small banks, of course with technology as enabler

The skeptic’s take on payment banks

Interesting article by Debashis Basu in Business Standard. He argues that payments bank are not allowed to lend thus defeating the objective of financial inclusion as also depriving them of a revenue source. He questions the over emphasis on financial inclusion and says small transactions are best left to done in cash. Read his interesting take on payment banks and their commercial viability

http://www.business-standard.com/article/opinion/debashis-basu-a-payment-bank-won-t-pay-114113000699_1.html

DOHA bank buys HSBC Oman operations in India

Doha Bank, which is planning to upgrade its branch set up in India into a wholly-owned subsidiary (WOS), yesterday received approval from shareholders to acquire HSBC Bank Oman’s operations in the South Asian country for about QR75mn.

The bank, which is aiming 30% of its net earnings from overseas operations, has chosen to acquire the tailor-made portfolio, in view of the time taken to achieve organic growth in the estimated Rs80tn Indian banking industry.

“India is a destination and it represents business opportunities,” Doha Bank Group CEO R Seetharaman told the media on the sidelines of extra-ordinary general assembly, where shareholders accorded their approval.

As per the terms, Doha Bank will make a single lump sum amount of Rs1.28bn (QR75mn) to HSBC Bank Oman, whose Indian branches — Mumbai and Kochi — together has assets to the tune of Rs3.4bn (QR200mn) and deposits of Rs1.17bn (QR70mn). (The exchange rate has been assumed at the latest figure of Rs17 to one riyal.)

HSBC Oman’s India operations have about 30 staff to serve 2,900 customer relationships. Foreign banks account for less than 1% of India’s total branch network, about 7% of the total banking sector assets and a sizeable 11% of profits as on March 2013.

Source : Gulf Times

Pay money to withdraw your own money

The new RBI directive on ATM usage  has allowed banks to charge even for own bank ATM withdrawal as long as at least 5 free transactions are allowed every month. YES, you read it right,  even on your own bank ATM).

For other bank ATM withdrawals the number of free transactions has been reduced from 5 to 3 in the six metro locations of Mumbai, New Delhi, Chennai, Kolkata, Bengaluru,

Beyond this, a fee of Rs.20/- per transaction would apply. But for locations other than these six metro centers, there is no change from the earlier norm.

RBI has now broadened the definition of the term 'transactions' to include even non-financial activities like balance enquiry, mini statement etc.

Though the RBI directive in this regard was effective from November 1, leading private sector banks like HDFC Bank and Axis Bank are implementing it from today (December 1).

Banker Times - 30 Nov 2014 - RJ

RBI prohibits Airtel, Vodafone & Idea from using existing channels for payments banks business

Source : BUSINESS STANDARD
Apparently when RBI issued the final guidelines on payments banks , it put in what is called a ring fencer rider . It means that  RBI would allow corporate groups, non-banking financial companies (NBFCs) and public sector entities to set up a bank only through a wholly-owned non-operative financial holding company (NOFHC).

The NOFHC, registered as an NBFC, will hold the bank and other financial services entities of the promoter group. "The objective is that the holding company should ring-fence the regulated financial services entities of the group, including the bank, from other activities of the group,"
Now this would involve a large set up cost for the telecom operators it would compel operators who are planning to set up payments banks to invest afresh in retailer and distribution networks purely to support banking operations. so that effectively means that if Vodaofone wants to start a payments bank it will first have to float a wholly owned NBFC which in turn will float the payment bank, the separation of the entities  will make it difficult for the telecom operators to use their existing infrastructure for the payments bank.



More on ring fencing

http://www.business-standard.com/article/budget/holding-company-to-ring-fence-bank-113022300057_1.html



Gold lenders and small banks



Gold lenders are eyeing the opportunity offered by RBI guidelines on Small banks. These lenders are in better position to take the advantge of the new door opened by RBI. Consider this
Mannapuram Finance has a extensive network of 3000+ branches across 27 states in the country.
Muthoot Finance has 4200+ branches spread across tier 2,3,4 markets in 21 states
This network is bigger than what most private sector banks and many public sector banks have , of this Muthoot has already applied for a banking license and Mannapuram is assessing the latest guidelines issued by the RBI for small financing segments.

Banker Times - 28 Nov 2014 - RJ

Welcome to the banker times which gives you the gist on key happenings in the banking & financial industry

Payment banks /Small Finance Banks

RBI today issued the final guidelines for the setting up of the Payment banks and the small finance banks in the country.

As is implied a payment bank is the one which will be allowed to accept deposits , issues debit cards and make remittances(upto a specified limit). It will be allowed to distribute financial products (non risk sharing simple financial products) like insurance and mutual funds but will not be allowed to lend money.All deposits must be invested in govt securities.

A small finance bank will be a bank for all practical purposes , however these banks will focus on the underserved areas of the country.

Entities like a telecom company or a retail chain can tap into their existing client base and provide them with technology based financial services like payments and withdrawals.

The objective for allowing payment banks as declared by RBI "to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users."

The purpose here is to provide basic banking services by using the geographical spread of non banking entities like telecom companies , retail chains , NBFCs,  etc. With technology as the enabler. These entities will provide the deposit and payment services by obtaining a license for the payment banks. The business entities are more interested in the stickiness  of  customer this facility introduces. Especially telecom such a facility may in fact reduce the churn among the operators which in itself would be big gain. This may also lead to all sorts of JV s etc between the entities and the banks.

However it would be interesting to see how things unfold. Oft the biggest of the changes are unexpected and unnoticed. This particular change appears to be one such which will create a revolution of sorts in the financial services industry.

With regards to small banks individuals, societies, NBFCs etc are allowed to apply for setting up of small banks. the objective here is to take banking to the unbanked areas of the country. Considering some of the NBFCs like Muthoot have more branches than many banks it will be interesting to see whether these NBFCs take the plunge. However considering the geographical restriction on the operations in the initial years , the NBFCs may not be much enthused about it.

 
Source : Money control and http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=32615

RBI Allows Banks To Lend Money Against Infra Bonds

Investing in infrastructure bonds has become even more lucrative now. The Reserve Bank of India (RBI) has said that now banks can give loans up to Rs 10 lakh per borrower against investment in long-term infrastructure bonds.

One must also note, that banks are not permitted to lend against bonds issued by other banks

Source : RBI & Business Insider