Tag: HRM in Global Perspective Mumbai University BMS Notes

University of Mumbai BMS Notes

Factors Affecting Exchange Rates

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The forex rate is the rate at which a currency is exchanged. For example, if the Indian rupee trades at Rs 74.46 to one dollar, the forex rate for the US dollar for the Indian rupee is 74.46. This rate can change depending on many factors. Therefore, forex rates are closely watched by currency traders and governments, who take steps to keep the rate advantageous to the country’s economic health. These exchange rates can have a tangible impact on investor portfolios on a granular level in terms of genuine returns.

Factors affecting

Speculation

If a country’s currency value is expected to rise, investors will demand more of that currency in order to make a profit in the near future. As a result, the value of the currency will rise due to the increase in demand. With this increase in currency value comes a rise in the exchange rate as well.

Inflation Rates

Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another’s will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates

Political Stability & Performance

A country’s political state and economic performance can affect its currency strength. A country with less risk for political turmoil is more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic stability. Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency. A country with sound financial and trade policy does not give any room for uncertainty in value of its currency. But, a country prone to political confusions may see a depreciation in exchange rates.

Government Debt

Government debt is public debt or national debt owned by the central government. A country with government debt is less likely to acquire foreign capital, leading to inflation. Foreign investors will sell their bonds in the open market if the market predicts government debt within a certain country. As a result, a decrease in the value of its exchange rate will follow.

Interest Rates

Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in interest rates cause a country’s currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates.

Recession

When a country experiences a recession, its interest rates are likely to fall, decreasing its chances to acquire foreign capital. As a result, its currency weakens in comparison to that of other countries, therefore lowering the exchange rate.

Terms of Trade

Related to current accounts and balance of payments, the terms of trade is the ratio of export prices to import prices. A country’s terms of trade improves if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher demand for the country’s currency and an increase in its currency’s value. This results in an appreciation of exchange rate.

Country’s Current Account / Balance of Payments

A country’s current account reflects balance of trade and earnings on foreign investment. It consists of total number of transactions including its exports, imports, debt, etc. A deficit in current account due to spending more of its currency on importing products than it is earning through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its domestic currency.

University of Mumbai BMS Notes

Globalization of the World Economy, Goals of International Finance, The Emerging Challenges in International Finance

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Globalization of the World Economy

Economic globalization is one of the three main dimensions of globalization commonly found in academic literature, with the two others being political globalization and cultural globalization, as well as the general term of globalization. Economic globalization refers to the widespread international movement of goods, capital, services, technology and information. It is the increasing economic integration and interdependence of national, regional, and local economies across the world through an intensification of cross-border movement of goods, services, technologies and capital. Economic globalization primarily comprises the globalization of production, finance, markets, technology, organizational regimes, institutions, corporations, and people.

While economic globalization has been expanding since the emergence of trans-national trade, it has grown at an increased rate due to improvements in the efficiency of long-distance transportation, advances in telecommunication, the importance of information rather than physical capital in the modern economy, and by developments in science and technology. The rate of globalization has also increased under the framework of the General Agreement on Tariffs and Trade and the World Trade Organization, in which countries gradually cut down trade barriers and opened up their current accounts and capital accounts. This recent boom has been largely supported by developed economies integrating with developing countries through foreign direct investment, lowering costs of doing business, the reduction of trade barriers, and in many cases cross-border migration.

Global actors

International governmental organizations

An intergovernmental organization or international governmental organization (IGO) refers to an entity created by treaty, involving two or more nations, to work in good faith, on issues of common interest. IGO’s strive for peace, security and deal with economic and social questions. Examples include: The United Nations, The World Bank and on a regional level The North Atlantic Treaty Organization among others.

International non-governmental organizations (NGOs)

International non-governmental organizations include charities, non-profit advocacy groups, business associations, and cultural associations. International charitable activities increased after World War II and on the whole NGOs provide more economic aid to developing countries than developed country governments.

Businesses

Since the 1970s, multinational businesses have increasingly relied on outsourcing and subcontracting across vast geographical spaces, as supply chains are global and intermediate products are produced. Firms also engage in inter-firm alliances and rely on foreign research and development. This in contrast to past periods where firms kept production internalized or within a localized geography. Innovations in communications and transportation technology, as well as greater economic openness and less government intervention have made a shift away from internalization more feasible. Additionally, businesses going global learn the tools to effectively interact in a culturally agile way with people of many diverse cultural backgrounds.

Migrants

International migrants transfer significant amounts of money through remittances to lower-income relatives. Communities of migrants in the destination country often provide new arrivals with information and ideas about how to earn money. In some cases, this has resulted in disproportionately high representation of some ethnic groups in certain industries, especially if economy success encourages more people to move from the source country. Movement of people also spreads technology and aspects of business culture, and moves accumulated financial assets.

Goals of International Finance

Profit Maximization

International financial management aims to maximize the profits of the organization by making correct investment decisions. It promotes investments that are safe and will generate good returns. Also, the utilization of funds should be such that the activities of the company go on without interruption. This will result in an increase in turnover and thus, profits.

Wealth Maximization of Shareholders

Wealth maximization of shareholders is one of the most important goals of international financial management. It is a long-term goal that a company cannot achieve just in a few days or even months. A company can achieve this objective by an excellent overall performance consistently year on year. By this, we mean that the managers should manage the funds such that it is always adequate as per the requirement of the company. Separate budgets for separate functions within the organization need to be made and implemented. Working capital management should be effective, production and other allied activities should go on uninterrupted and employee welfare should also be a priority.

Maximization of Shareholder Value

International financial management aims to maximize shareholder value by ensuring the maximum possible dividend payout. This can happen by ensuring that the company performs well. The managers have to manage the company’s finances in the most effective and efficient manner so as to increase the net profits of the company.

Effective Inflation Risk Management

Another goal of international financial management is to effectively manage the inflation risk that may arise in different countries at different times. Inflation or the continuous rise in prices of inputs can cause a major financial strain on any company. The output price or the selling price may not increase immediately due to market constraints, resulting in lower profits or even losses.

Foreign Exchange Risk Management

As we all know foreign exchange risk is an essential and important part of international trade. Hence, managers have no choice but to manage foreign exchange rate risk timely and effectively. Exchange rates are volatile and unpredictable. They can result in gains as well as heavy losses in case they are not favorable for the company.

Proper Tax Planning

International financial management aims to promote tax planning in the best possible way. Different countries have different tax slabs, liabilities, and exemptions. Managers should be efficient enough to study in detail the taxation policies of all of the countries wherever they operate.

Effectively Use Expanded Sets of Opportunities

International financial management aims to make the best possible use of opportunities that arise from investing in different countries. Interest rates and the cost of capital can be very low in some countries. Or labor can be inexpensive in some other country. Some foreign markets may have the extra potential for a particular line of product. The managers should be dynamic and flexible in this fast-changing business environment.

Political Risk Management

Effective political risk management is one of the important goals of international financial management. The management should take into account cases of political unrest or instability in countries before they invest there. Political risk can arise in the domestic market too, and hence they should be cautious about it.

Optimum Rate of Interest

International financial management aims to achieve an optimum rate of interest on the funds that a company borrows. The managers should check and compare all the possible options of finance that a company has. They should choose the source that is reliable, safe, and with the least possible rate of interest. Lower interest or lower financing costs will boost the profits in turn.

The Emerging Challenges in International Finance

Banking Regulations

Unlike financial management in a single country, global financial management must deal with many other banking institutions that have problems of their own. Some multilateral development banks, such as the International Monetary Fund and World Bank, have been set up to regulate international economic affairs in emerging economies and typically give conditions to various countries and their banks. This can be a challenge when doing business in a country where these institutions have influence, since they advise banks in such countries to avoid testing waters in the riskier markets in its structural adjustment programs.

Culture

International finance has also challenge of culture of each country. India is veg. country. So, McDonnell and other non-veg. country should ban to produce the non-veg. in India.

Risk Management Challenges

Risk management is a major challenge of global financial management. For example, if you’re buying supplies or selling products overseas, your business may face the risk of high prices caused by inflation in emerging economies. Although vulnerability to financial crises in many emerging markets has been reduced significantly due to stronger balance sheets, better fiscal policies and more flexible exchange rate regimes, other factors still pose risks. Potential threats to energy supplies, imbalances in the world economy and other fiscal sustainability issues call for prudent financial planning and management of those risks that most affect your particular business.

Challenge of Protection of Natural Resources

When there is more international finance, its growth will affect the natural resources. For example, after increasing the number of banks in India, ACs are used at large scale due to this, there is increasing the temperature of India. Who is responsible for this? Surely international banks are responsible who are opening the branches in India. Every increase in the number of bank branch means, 4 new installations of ACs which increases open environmental temperature. So, this is big challenge of international finance. It has to reduce by planting the tree and not to use ACs in office.

Diverse Economic Environment

Operating in a globalized environment means being answerable to different countries with different political environments and cultural norms, as well as trade procedures and tax conditions to comply with. In addition, the credit conditions may be totally different from what they are domestically. Anticipate day-to-day financial management challenges when operating internationally and devise ways to maintain healthy equilibrium within this economic framework to ensure your business’s continued growth and survival.

Dynamic Foreign Exchange Rates

In a globalized economy, the cash that goes in and out of the various countries is subject to fluctuations in exchange rates. This creates uncertainty for financial managers when it comes to the value of the home currency in relation to foreign currencies. Continuous fluctuations in the foreign exchange market could mean slow business for global organizations. If you need part of your financing for projects in emerging economies where you conduct your business, fluctuating exchange rates can subject you to higher interest rates. You have to monitor the foreign exchange market closely for suitable rates that benefit your organization.

University of Mumbai BMS Notes

Introduction to Balance of Payment, Accounting Principles in Balance of Payment

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The balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world. These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.

The balance of payments consists of two components: the current account and the capital account. The current account reflects a country’s net income, while the capital account reflects the net change in ownership of national assets.

Important

The BoP statement provides a clear picture of the economic relations between different countries. It is an integral aspect of international financial management. Now that you have understood BoP and its components, let’s look at why it is important.

To begin with, the BoP statement provides information pertaining to the demand and supply of the country’s currency. The trade data shows a clear picture of whether the country’s currency is appreciating or depreciating in comparison with other countries. Next, the country’s BoP determines its potential as a constructive economic partner. In addition, a country’s BoP indicates its position in international economic growth.

By studying its BoP statement and its components closely, a country would be able to identify trends that may be beneficial or harmful to the economy and take appropriate measures.

The International Monetary Fund (IMF) use a particular set of definitions for the BoP accounts, which is also used by the Organisation for Economic Co-operation and Development (OECD), and the United Nations System of National Accounts (SNA).

The main difference in the IMF’s terminology is that it uses the term “financial account” to capture transactions that would under alternative definitions be recorded in the capital account. The IMF uses the term capital account to designate a subset of transactions that, according to other usage, previously formed a small part of the overall current account. The IMF separates these transactions out to form an additional top-level division of the BoP accounts. Expressed with the IMF definition, the BoP identity can be written:

Current account + Financial account + Capital account + Balancing item =0

The IMF uses the term current account with the same meaning as that used by other organizations, although it has its own names for its three leading sub-divisions, which are:

  • The goods and services account (the overall trade balance)
  • The primary income account (factor income such as from loans and investments)
  • The secondary income account (transfer payments)

Imbalances

While the BoP has to balance overall, surpluses or deficits on its individual elements can lead to imbalances between countries. In general there is concern over deficits in the current account. Countries with deficits in their current accounts will build up increasing debt or see increased foreign ownership of their assets. The types of deficits that typically raise concern are

  • A visible trade deficit where a nation is importing more physical goods than it exports (even if this is balanced by the other components of the current account.)
  • An overall current account deficit.
  • A basic deficit which is the current account plus foreign direct investment (but excluding other elements of the capital account like short terms loans and the reserve account.)

Accounting Principles in Balance of Payment

The balance of payments account of a country is constructed on the principle of double-entry book-keeping. Each transaction is entered on the credit and debit side of the balance sheet. But balance of payments accounting differs from business accounting in one respect.

In business accounting, debits (-) are shown on the left side and credits (+) on the right side of the balance sheet. But in balance of payments accounting, the practice is to show credits on the left side and debits on the right side of the balance sheet.

When a payment is received from a foreign country, it is a credit transaction while payment to a foreign country is a debit transaction. The principal items shown on the credit side (+) are exports of goods and services, unrequited (or transfer) receipts in the form of gifts, grants etc. from foreigners, borrowings from abroad, investments by foreigners in the country and official sale of reserve assets including gold to foreign countries and international agencies.

The principal items on the debit side (-) include imports of goods and services, transfer (or unrequited) payments to foreigners as gifts, grants, etc., lending to foreign countries, investments by residents to foreign countries and official purchase of reserve assets or gold from foreign countries and international agencies.

These credit and debit items are shown vertically in the balance of payments account of a country according to the principle of double-entry book-keeping. Horizontally, they are divided into three categories: the current account, the capital account and the official settlements account or the official reserve assets account.

Three main elements of actual process of measuring international economic activity are:

  • Identifying what is/is not an international economic transaction,
  • Understanding how the flow of goods, services, assets, money create debits and credits, and
  • Understanding the bookkeeping procedures for BoP accounting.

The following some simple rules of thumb help to the reader to understand the application of accounting principles for balance of payments accounting.

  • Any individual or corporate transaction that leads to increase in demand for foreign currency (exchange) is to be recorded as debit, because if is cash outflow, while a transaction which results in increase the supply of foreign currency (exchange) is to be recorded as a credit entry.
  • All transactions, which result an immediate or prospective payment from the rest of the world (RoW) to the country should be recorded as credit entry. On the other hand, the transactions, which result in an actual or prospective payment from the country to the RoW should be recorded as debits.

Credit

Debit
Exports of goods and services Imports of goods and services
Income receivable from abroad Income payable to abroad
Transfers from abroad Transfers to abroad
Increases in external liabilities Decreases in external liabilities
Decreases in external assets Increases in external assets

Current Account:

The current account of a country consists of all transactions relating to trade in goods and services and unilateral (or unrequited) transfers. Service transactions include costs of travel and transportation, insurance, income and payments of foreign investments, etc. Transfer payments relate to gifts, foreign aid, pensions, private remittances, charitable donations, etc. received from foreign individuals and governments to foreigners.

In the current account, merchandise exports and imports are the most important items. Exports are shown as a positive item and are calculated f.o.b. (free on board) which means that costs of transportation, insurance, etc. are excluded. On the other side, imports are shown as a negative item and are calculated c.i.f. (costs, insurance and freight) and included.

The difference between exports and imports of a country is its balance of visible trade or merchandise trade or simply balance of trade. If visible exports exceed visible imports, the balance of trade is favourable. In the opposite case when imports exceed exports, it is unfavourable.

It is, however, services and transfer payments or invisible items of the current account that reflect the true picture of the balance of payments account. The balance of exports and imports of services and transfer payments is called the balance of invisible trade.

The invisible items along with the visible items determine the actual current account position. If exports of goods and services exceed imports of goods and services, the balance of payments is said to be favourable. In the opposite case, it is unfavourable.

In the current account, the exports of goods and services arid the receipts of transfer payments (unrequited receipts) are entered as credits (+) because they represent receipts from foreigners. On the other hand, the imports of goods and services and grant of transfer payments to foreigners are entered as debits (-) because they represent payments to foreigners. The net value of these visible and invisible trade balances is the balance on current account.

Capital Account:

The capital account of a country consists of its transactions in financial assets in the form of short-term and long-term lending’s and borrowings and private and official investments. In other words, the capital account shows international flows of loans and investments, and represents a change in the country’s foreign assets and liabilities.

Long-term capital transactions relate to international capital movements with maturity of one year or more and include direct investments like building of a foreign plant, portfolio investment like the purchase of foreign bonds and stocks and international loans. On the other hand, short- term international capital transactions are for a period ranging between three months and less than one year.

There are two types of transactions in the capital account; private and government. Private transactions include all types of investment: direct, portfolio and short-term. Government transactions consist of loans to and from foreign official agencies.

In the capital account, borrowings from foreign countries and direct investment by foreign countries represent capital inflows. They are positive items or credits because these are receipts from foreigners. On the other hand, lending to foreign countries and direct investments in foreign countries represent capital outflows.

They are negative items or debits because they are payments to foreigners. The net value of the balances of short-term and long-term direct and portfolio investments is the balance on capital account. The sum of current account and capital account is known as the basic balance.

The Official Settlements Account:

The official settlements account or official reserve assets account is, in fact, a part of the capital account. But the U.K. and U.S. balance of payments accounts show it as a separate account. “The official settlements account measures the change in nations’ liquidity and non-liquid liabilities to foreign official holders and the change in a nation’s official reserve assets during the year.

The official reserve assets of a country include its gold stock, holdings of its convertible foreign currencies and SDRs, and its net position in the IMF”. It shows transactions in a country’s net official reserve assets.

Errors and Omissions:

Errors and omissions is a balancing item so that total credits and debits of the three accounts must equal in accordance with the principles of double entry book-keeping so that the balance of payments of a country always balances in the accounting sense.

University of Mumbai BMS Notes

Add-on Cards

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An Add-On Card is a privilege offered to the close family members of a primary credit cardholder. The add-on card comes with the same features of the primary credit cardholder, which can be availed by the closest family member.

Eligibility for Add-On Card The closest family members of the primary credit cardholder are eligible. However, the closest family member must be above the age of 18. Here is a list of those who can avail an add-on card.

  • Parents
  • Spouse
  • Siblings
  • Children
  • Parents-in-law
  • Sister/Brother-in-law
  • Son/Daughter-in-law

Add-on Credit Cards by Popular Banks

  • SBI Add-on Credit Cards
  • HDFC Add-on Credit Cards
  • ICICI Add-on Credit Cards
  • Axis Bank Add-on Credit Cards
  • CitiBank Add-on Credit Cards
  • RBL Bank Add-on Credit Cards
  • Standard Chartered Add-on Credit Cards
  • HSBC Add-on Credit Cards
  • Kotak Mahindra Add-on Credit Cards
  • Bank of India Add-on Credit Cards

Features of Add-On Credit Cards

Primarily, add-on credit cards share all the features of the main credit card. All the benefits offered by the primary card are available on the supplementary card. However, there are a few aspects you need to understand while using an add-on credit card.

Credit limit of an add-on credit card: Add-on credit cards have the same credit limit as that of the primary credit card. You can use add-on credit card up to total credit limit on the card account.

Some card issuers also allow primary cardholders to set a limit on each add-on credit card. It could be same or lesser than the total credit limit on the account.

The same stands true for cash withdrawal limit or cash limit. While most banks provide a default cash limit of 100% on add-on cards, a few like HDFC provide a lesser cash limit to add-on cardholders.

Reward points on add-on credit cards: Add-on credit cardholders earn the reward points at the same rate as that of the primary cardholder. This means the number of reward points, minimum transaction amount, redemption options, etc., remain the same.

The accrued reward points get credited to the primary cardholders account. While redeeming the points, you can use the consolidated points.

Airport lounge access on add-on cards: Not all credit card providers allow the add-on cardholders to enjoy the complimentary airport lounge access provided to the primary cardholder.

Especially, the free membership offered on airport Priority Pass Program and others are exclusive for primary cardholders.

However, there are a few card issuers that allow primary and supplementary cardholders to share the free visits.

Offers on add-on credit cards: Most of the card issuers consider add-on credit card as another card in providing the offers. If it is the case with your card as well, the primary cardholder and the add-on cardholder can avail the offer separately. Typical credit card offers include discounts, cashback, free gifts, vouchers, etc.

University of Mumbai BMS Notes

Benefits of Credit Cards, Dangers of Debit Cards

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Features

Easy approval

A credit card can be applied online as well as offline. The eligibility criteria are simple and involve only a few basic documents.

EMI payments

One of the best credit card features is that you can use the card to convert your high-end purchases into affordable EMIs effortlessly, which can be paid over a period of time.

Customised card limit

The credit card limit varies from one cardholder to another and is decided by the issuer based on the credit history and score. Generally, the better the score and history, the higher is the credit limit.

Loans during an emergency

Credit card facilities can also be used to avail a personal loan to address any emergencies that may arise.

Discounts and Offers

Undoubtedly, the best credit card perks are the discounts and offers that can be availed on a range of products ranging from accessories, electronics, clothes, etc.

ATM cash withdrawal

Another one of the top advantages of using a credit card is that, much like a debit card, it too can be used to withdraw cash from ATM. An interest and a fee might be charged for such transactions, though some issuers offer the benefit of no interest withdrawals too.

Rewards

Reward points are also one of the top advantages of using a credit card. These reward points can be earned based on spends and credit card type, and can be later used to avail discounts, gift vouchers, etc.

Secure pay

This is a digital card that can be used to pay for a wide array of products and services and can be protected using multi-factor authentication and in-hand security features. It is, therefore, a secure means of transaction and reduces the dependency on cash.

Benefits of Credit Cards

Freedom from cash

The elimination of the need to carry cash around for purchasing items is definitely one of the top benefits of having a credit card. You can enter the card details on the website when you shop online or swipe the card at an offline store to complete your purchase.

Buy big-ticket items on credit

One of the best credit card benefits is the option to buy now and pay later. The principle allows you to make big purchases on borrowed credit so that your monthly budget does not take a hit. Also, once you have purchased the items, you can convert the cost of these items into low-cost EMIs which can be repaid over a period of time. This aspect of the credit card has revolutionised the entire shopping experience for the better.

Access to cashbacks, rewards, and offers

The most sought after credit card advantages are the special discounts, cash back or reward points that can be collected when making purchases using a credit card. There are special credit cards too that may be associated with specific retailers, shopping websites, travel websites, etc. In such cases, the rewards may vary accordingly. Points collected can also be used for making purchases in the future.

Accepted mode of payment worldwide

The fact that the credit card is the most commonly accepted mode of payment, worldwide, allows cardholders the opportunity to enjoy the benefits of using credit cards anywhere.

Cash withdrawals from ATM

In exchange for a nominal fee, credit cards allow customers to withdraw cash from the ATM to address emergencies.

Emergency payments

The credit card can come in handy for addressing expenses during emergencies, such as a medical emergency. This saves the worries and hassles of gathering funds to pay bills at a moment of crisis.

Credit score

The advantages of credit cards to customers does not entail only making purchases on credit. Instead, it extends to functioning as a means of improving your credit score. This credit score plays a critical role in deciding your creditworthiness and eligibility for loans. By paying your credit card bills on time, you can significantly improve your credit score and credit history.

Dangers of Debit Cards

Phantom charges

If you use a credit card at a hotel, the hotel takes an imprint when you check in, but doesn’t charge your card until you check out. It’s a far different story with a debit card. Generally, hotels will put a “Hold” on funds in your account for more than you’re spending. Yes, more. They hold the full amount of your stay, plus an estimated amount for “incidentals,” such as meals at the hotel restaurant and dipping into the mini-bar. This is not an actual charge the hold will come off your account at the end of your stay. But it affects the available balance in your checking account anyway and can lead to overdrafts.

Pay Now/Reimburse Later

If someone has fraudulently used your credit card, you don’t have to pay the charge. But when somebody has fraudulently used your debit card, the money comes directly out of your account in real time. That means you’re out the money while the bank does a leisurely examination of their records to investigate your fraud claim. Many consumers complaining to Privacy Rights Clearing House said they lost access to their funds for several weeks. In the meantime, they were caught short and unable to pay their bills, Givens said.

Loss Limits

Like credit cards, federal law limits your liability for fraudulent transactions on a debit card to Rs. 500/-. But that’s only if you notify your financial institution within two days of discovering the theft. If you’re a space cadet and don’t check your bank statements for a couple of months, you could lose everything.

Merchant disputes

The same problem affects merchant disputes. If you pay with a credit card when ordering something online, and that product comes damaged, broken or not at all, you can dispute the charge and stop payment with your credit card. If you used your debit card, the charge is paid when you made the order. By the time you find out the goods weren’t what was advertised, the merchant has your cash and you’re in the unenviable position of having to fight to get your money back.

University of Mumbai BMS Notes

Consumer Finance Practice in India, Mechanics of Consumer Finance, Terms, Pricing

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Demand for credit-fuelled consumption:

With India’s financial industry evolving at an unprecedented rate, demand for credit in the country has also seen consistent growth over the years. The rise in the ‘affluent middle class’ and growth in the rural economy is changing consumer spending patterns and driving the bulk of India’s consumption growth. India’s domestic credit growth has averaged 15.1 per cent from March 2000 to March 2021, primarily driven by retail loans and increasing penetration of credit cards. The Indian consumer credit market continues to expand at a rate higher than most other major economies globally with 22 million Indian consumers applying for new credits every month.

Increase in the purchasing power of an average Indian:

India’s consumption expenditure is more than double of that in countries like Brazil. The private final consumption expenditure has been consistently rising over the past five years and has reached INR 123.1 Mn (USD 1.70 Mn) in 2020. India’s household debt has grown at an annualised rate of over 13 percent in the last five years.

A shift in the demographic profile of the consumer:

India is one of the world’s youngest nations adding more working-age citizens every day. The new generation comprising of millennials and Gen-Z have better access to education, employment, and better incomes, leading them to break away from frugality and increased consumer spending. Along with the rise in income levels, consumers are spending on aspirational categories like lifestyle products, consumer durables, and jewellery. With India’s rising affluence, domestic consumption in the last decade has also increased 3.5 times from INR 31 Tn (USD 0.42 Tn) to INR 110 Tn (USD 1.50 Tn).

The rising role of fintech:

The most rapidly growing industry serving both consumers and businesses is fintech, who can be heralded as an innovation of the decade. When India’s financial services industry was once dominated by banks, fintechs created their own niche space by targeting customers from urban and rural regions who were rejected by banks due to lack of credit history or collateral. While introduce new innovative products, the fintech industry has also brought in the concept of ‘sachet packaging’ for easy access to financial products – available anytime, anywhere, and in any quantity. With rising customer expectations, the advent of e-commerce, and smartphone penetration, the Indian fintech ecosystem has grown manifold in the last few years.

Growth Trends:

  • Unsecured Products have seen an increase in loan books at a CAGR of 38 per cent vis-a-vis Secured Products, which grew at a CAGR of 17 per cent from 2017 to 2020.
  • With the increase in consumerism and financial institutions, the new sanctioned loans have surged between FY18 and FY20 at a cumulative growth rate of 39 per cent. Unsecured loans, being the major contributor, grew with an impressive CAGR of 49 per cent.
  • There has been in an increase in expansion of credit to tier 3 and 4 markets for lending. These markets have witnessed a sharp rise in low-ticket high-volume lending products like two-wheelers, entry-level cars, and affordable housing. Meanwhile, metros remain the biggest lending markets given the skew of the working population.
  • The Indian economy has bounced back faster than expected in the second quarter of 2020 to 21 with a contraction of 7.5 per cent. A V-shaped recovery began after April 2020 and the current financial year is expected to be one of high economic growth.
  • Legacy banking systems are paving the way for new-age lending systems driven by technology that will offer customised financial products and services to the masses.
  • The rise in incomes in rural India has led to growing demand within the micro insurance sector.

Different forms for financing consumers:

Cash Loan:

In this form, the buyer consumer gets loan amount from bank or non- banking financial institutions for purchasing the required goods from seller. Banker acts as lender. Lender and seller are different. Lender does not have the responsibilities of a seller.

Revolving Credit:

It is an ongoing credit arrangement. It is similar to overdraft facility. Here a credit limit will be sanctioned to the customer and the customer can avail credit to the extent of credit limit sanctioned by the financier. Credit Card facility is an excellent example of revolving credit.

Secured Credit:

In this form, the financier advances money on the security of appropriate collateral. The collateral may be in the form of personal or real assets. If the customer makes default in payments, the financier has the right to appropriate the collateral. This kind of consumer credit is called secured consumer credit.

Fixed Credit:

In this form of financing, finance is made available to the customer as term loan for a fixed period of time i.e., for a period of one to five years. Monthly installment loan, hire purchase etc. are the examples.

Unsecured Credit:

When financier advances fund without any security, such advances are called unsecured consumer credit. This type of credit is granted only to reputed customers.

University of Mumbai BMS Notes

Performance of Credit Cards and Debit Cards

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Key Performance Indicators, popularly known as KPIs, are very important in the evaluation of business performance on different levels. They basically represent a set of measures that focus on important aspects of business performance for the overall success of the business. KPIs in the credit world are invaluable for the following reasons:

  • They help a business to stay focused on productivity.
  • They give you an insight into the overall health of your portfolio.
  • Through the generated data, you can get easy and actionable insights that will drive your business to profitability.

There is so much risk-taking in a credit card business. Since companies are always at risk of losing a high amount of money, they have to constantly evaluate just how safe the business is. They also need to evaluate the information protection measures in order to improve their system stability and the security of the business.  For every financial institution, it is important to always evaluate its credit risk from the expected revenue and the expected loss. Every part of credit card processing needs to be gauged to track down how each operation has been occurring after a certain period of time.

Performance of Debit Cards

Building Customer Loyalty

A growing body of research shows that highly active debit cards drive overall customer engagement, strengthening a bank’s relationship with its customers and increasing their loyalty.

Optimizing debit portfolios and driving debit card usage can pay dividends beyond the value of additional transactions. A highly engaged current-account consumer can generate substantially more revenue for a bank by remaining more loyal and adopting multiple banking products.

Highly-engaged debit consumers are also big e-commerce shoppers, using both debit and credit cards, and they’re more prone to want the latest technologies. According to Digital Transactions, a recent survey by Auriemma Consulting Group found that the use of debit cards is increasing for online and big-ticket purchases, a sign of rising consumer trust in e-commerce and confidence in personal finances.

Cross-Sell Opportunities

At the same time, debit can boost cross-sell opportunities for banks. The more a customer uses a debit card, the stronger their relationship is with the bank, and the greater the chance that they will expand the relationship to additional products and act as a brand advocate. As a result, banks can more easily migrate customers from initial checking and savings accounts to credit, loans, investments and new technologies like contactless and digital wallets. For example, if a highly-engaged debit customer decides to buy a home, the bank holding the debit account is more likely to be top of mind when shopping for a mortgage.

University of Mumbai BMS Notes

Prevention of Frauds and Misuse, Consumer Protection. Indian Scenario

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Debit card fraud occurs when a criminal gains access to your debit card number and in some cases, personal identification number (PIN) to make unauthorized purchases or withdraw cash from your account. There are many different methods of obtaining your information, from unscrupulous employees to hackers gaining access to your data from a retailer’s insecure computer or network. Fortunately, it doesn’t take any special skills to detect debit card fraud.

When your debit card is used fraudulently, the money goes missing from your account instantly. Payments you’ve scheduled or checks you’ve mailed may bounce, and you may not be able to afford necessities. It can take a while for the fraud to be cleared up and the money restored to your account.

Credit card fraud is an inclusive term for fraud committed using a payment card, such as a credit card or debit card. The purpose may be to obtain goods or services or to make payment to another account, which is controlled by a criminal. The Payment Card Industry Data Security Standard (PCI DSS) is the data security standard created to help financial institutions process card payments securely and reduce card fraud.

Credit card fraud can be authorised, where the genuine customer themselves processes a payment to another account which is controlled by a criminal, or unauthorised, where the account holder does not provide authorisation for the payment to proceed and the transaction is carried out by a third party. In 2018, unauthorised financial fraud losses across payment cards and remote banking totalled £844.8 million in the United Kingdom. Whereas banks and card companies prevented £1.66 billion in unauthorised fraud in 2018. That is the equivalent to £2 in every £3 of attempted fraud being stopped.

Credit cards are more secure than ever, with regulators, card providers and banks taking considerable time and effort to collaborate with investigators worldwide to ensure fraudsters aren’t successful. Cardholders’ money is usually protected from scammers with regulations that make the card provider and bank accountable. The technology and security measures behind credit cards are becoming increasingly sophisticated making it harder for fraudsters to steal money.

Protection

Go Paperless

Signing up for paperless bank statements will eliminate the possibility of having bank account information stolen from your mailbox. Shredding existing bank statements and debit card receipts using a paper shredder when you’re done with them will significantly reduce the possibility of having bank account information stolen from your trash.

Get Banking Alerts

In addition to checking your balance and recent transactions online daily, you can sign up for banking alerts. Your bank will then contact you by email or text message when certain activity occurs on your accounts, such as a withdrawal exceeding an amount you specify or a change of address.

Don’t Make Purchases with Your Debit Card

Use a credit card, which offers greater protection against fraud, rather than a debit card.

Destroy Old Debit Cards

Some shredders will take care of this for you; otherwise, your old card floating around puts your information at risk.

Don’t Keep All Your Money in One Place

If your checking account is compromised, you want to be able to access cash from another source to pay for necessities and meet your financial obligations.

Stick to Bank ATMs

Bank ATMs tend to have better security (video cameras) than automated teller machines at convenience stores, restaurants, and other places.

Beware of Phishing Scams

When checking your email or doing business online, make sure you know who you’re interacting with. An identity thief may set up a phishing web site that looks like it belongs to your bank or another business you have an account with. In reality, the scammer is looking to get access to your personal information and may attempt to access your bank account.

Use a Secured Network

Don’t do financial transactions online, when using your mobile devices or computer in a public place or over an unsecured network.

Protect Your Computer and Mobile Devices

Use firewall, anti-virus, and anti-spyware software on your computer and mobile devices, while keeping it updated regularly.

Card information is stored in a number of formats. Card numbers formally the Primary Account Number (PAN) are often embossed or imprinted on the card, and a magnetic stripe on the back contains the data in a machine-readable format. Fields can vary, but the most common include Name of the card holder; Card number; Expiration date; and Verification CVV code.

In Europe and Canada, most cards are equipped with an EMV chip which requires a 4-to-6-digit PIN to be entered into the merchant’s terminal before payment will be authorized. However, a PIN isn’t required for online transactions. In some European countries, if you don’t have a card with a chip, you may be asked for photo-ID at the point of sale.

In some countries, a credit card holder can make a contactless payment for goods or services by tapping their card against a RFID or NFC reader without the need for a PIN or signature if the cost falls under a pre-determined limit. However, a stolen credit or debit card could be used for a number of smaller transactions prior to the fraudulent activity being flagged.

Card issuers maintain several countermeasures, including software that can estimate the probability of fraud. For example, a large transaction occurring a great distance from the cardholder’s home might seem suspicious. The merchant may be instructed to call the card issuer for verification or to decline the transaction, or even to hold the card and refuse to return it to the customer.

University of Mumbai BMS Notes

Smart Cards Features, Types, Security Features and Financial Applications

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A smart card, chip card, or integrated circuit card (ICC or IC card) is a physical electronic authorization device, used to control access to a resource. It is typically a plastic credit card-sized card with an embedded integrated circuit (IC) chip. Many smart cards include a pattern of metal contacts to electrically connect to the internal chip. Others are contactless, and some are both. Smart cards can provide personal identification, authentication, data storage, and application processing. Applications include identification, financial, mobile phones (SIM), public transit, computer security, schools, and healthcare. Smart cards may provide strong security authentication for single sign-on (SSO) within organizations. Numerous nations have deployed smart cards throughout their populations.

The universal integrated circuit card, or SIM card, is also a type of smart card. As of 2015, 10.5 billion smart card IC chips are manufactured annually, including 5.44 billion SIM card IC chips.

Magnetic stripe technology remains in wide use in the United States. However, the data on the stripe can easily be read, written, deleted or changed with off-the-shelf equipment. Therefore, the stripe is really not the best place to store sensitive information. To protect the consumer, businesses in the U.S. have invested in extensive online mainframe-based computer networks for verification and processing. In Europe, such an infrastructure did not develop — instead, the card carries the intelligence.

The microprocessor on the smart card is there for security. The host computer and card reader actually “talk” to the microprocessor. The microprocessor enforces access to the data on the card. If the host computer read and wrote the smart card’s random access memory (RAM), it would be no different than a diskette.

Smarts cards may have up to 8 kilobytes of RAM, 346 kilobytes of ROM, 256 kilobytes of programmable ROM, and a 16-bit microprocessor. The smart card uses a serial interface and receives its power from external sources like a card reader. The processor uses a limited instruction set for applications such as cryptography.

The most common smart card applications are:

  • Credit cards
  • Electronic cash
  • Computer security systems
  • Wireless communication
  • Loyalty systems (like frequent flyer points)
  • Banking
  • Satellite TV
  • Government identification

Features

Secure data storage. Smart cards provide a way to securely store data on the card. This data can only be accessed through the smart-card operating system by those with proper access rights. This feature can be utilized by a system to enhance privacy by storing personal user data on the card rather than in a central database, for example. In this situation, the user has better knowledge and control of when their personal data is being granted access and who is involved.

Authentication. Smart cards provide ways to authenticate others who want to gain access to the card. These mechanisms can be used to validate users, devices, or applications wishing to use the data on the card’s chip. These features can protect privacy by ensuring that a banking application has been authenticated as having the appropriate access rights before accessing financial data or functions on the card, for example.

Encryption. Smart cards provide a robust set of encryption capabilities, including key generation, secure key storage, hashing, and digital signing. These capabilities can be used to protect privacy in many ways. For example, a smart-card system can produce a digital signature for an e-mail message, providing a way to validate the e-mail’s authenticity. This protects the message from being tampered with, and also provides the recipient with assurance about origination. The fact that the signing key originated from a smart card adds credibility to the origin and the intent of the signer.

Secure communications. Smart cards provide secure communication between the card and reader. Similar to security protocols used in many networks, this feature allows smart cards to send and receive data in a secure, private manner.

Biometrics. Smart cards provide ways to securely store biometric templates and perform biometric matching functions. These features can be used to improve privacy in systems that use biometrics.

Strong device security. Smart-card technology is extremely difficult to duplicate or forge, and has built-in tamper resistance. Smart-card chips include a variety of hardware and software capabilities that detect and react to tampering attempts, and help counter possible attacks.

Personal device. A smart card is, of course, a personal and portable device associated with a particular cardholder. The smart-card plastic is often personalized, providing an even stronger binding to the cardholder. These features, while somewhat obvious, can be leveraged to improve privacy. For example, a healthcare application might elect to store prescription information on the card vs. on paper to improve the accuracy and privacy of patient prescriptions.

Types

Contact less Smart Card:

This type of smart card establishes connection with the card reader without any physical contact. It consists of an antenna by means of which it is used to communicate using radio frequency band with the antenna on the reader. It receives power from the reader via the electromagnetic signal.

Contact Smart Card:

This type of smart cards is embedded with electrical contacts which are used to connect to the card reader where the card is inserted. The electrical contacts are deployed on a conductive gold-plated coating on the card surface.

Dual-interface cards:

This type of smart card is equipped with both contact less and contact interfaces. This type of card enables secure access to the smart card’s chip with either the contact less or contact smart card interfaces.

Memory based smart card:

This type of smart cards are embedded with memory circuits. It stores, reads and writes data to a particular location. It is straight memory card which is only used to store data or a protected memory card with a restricted access to the memory and which can be used to write data. It can also be a rechargeable or a disposable card which contains memory units which can be used only once.

Microprocessor based smart card:

This type of smart cards consists of microprocessor embedded onto the chip in addition to the memory blocks. It also consists of specific sections of files related with a particular function. It allows for data processing and manipulations and can be used for multi functioning.

Hybrid smart card:

Hybrid smart card embedded with both memory and microprocessor. Two different chips are used for different applications connected to a single smart card based on the different functionality as the proximity chip is used for physical access to prohibited areas while the contact smart card chip is used for sign in authentication.

Security Features

Laser Engraving:

Using different laser types with varying wavelengths, names, card numbers or other inscriptions can be engraved into cards in a manner that is easy on the card material. Through engraving, labelling is not removable. The process of engraving labels has simple and variable programming.

Ghost Images:

A ghost image is a semi-visible graphic, usually another photo of the cardholder, which is applied to the card. Sometimes ID numbers or logos with reduced transparency are also printed into the background of the card. The process is inexpensive and can be copied only with great difficulty.

Photos:

The most obvious and widely used security feature for personal identification is a passport photo. These are applied to the card in high quality through color printing, usually using the inkjet drop-on-demand method or sometimes through laser engraving and other techniques. Passport photos have the great advantage of functioning without a reading device. In addition, supplemental bio-metric data can be added to photos on driver’s licenses or ID cards to render them machine-readable.

Signature:

In addition to photos, reference signatures on cards are also a common safety feature, including when paying by debit or credit card. Security signature fields increase the copy protection in that the signing area can be damaged obviously by friction or contact with chemicals.

Financial Applications

Healthcare

With health care data rapidly increasing, smart cards assist with maintaining the efficiency of patient care and privacy safeguards. The cards allow medical facilities to safely store information for a patient’s medical history, instantly access the information and update it if needed and reduce health care fraud. Instant patient verification provides for immediate insurance processing. In addition, smart cards enable compliance with government initiatives, such as organ donation programs.

Computer & Network Security

Microsoft Windows, new versions of Linux and Sun Microsystems have begun using smart cards as a replacement for user names and passwords. Understanding that Public Key Infrastructure (PKI)-enhanced security is needed, a smart card badge is becoming the new standard. Using smart cards, users can be authenticated and authorized to have access to specific information based on preset privileges.

Banking & Retail

Some of the most common uses for smart cards are ATM cards, credit cards and debit cards. Many of these cards are “chip and PIN” cards that require the customer to supply a four- to six-digit PIN number, while others are known as “chip and signature” cards, needing only a signature for verification.

Other financial and retail uses for smart cards include fuel cards and public transit/public phone payment cards. They can also be used as “electronic wallets” or “purses” when the chip is loaded with funds to pay for small purchases such as groceries, laundry services, cafeteria food and taxi rides. Cryptographic protocols protect the exchange of money between the smart card and the machine, so no connection to a bank is needed.

Mobile Communications

For digital mobile phones, smart cards can also be used as identification devices. These cards are known as Subscriber Identity Molecules (SIM) cards. Each SIM card has a unique identifier that manages the rights and privileges of each subscriber and makes it easy to properly identify and bill them.

University of Mumbai BMS Notes

Credit Rating Agencies in India, Limitations of Rating

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Credit Rating Agencies in India

Infomerics Valuation and Rating Private Limited

An RBI-accredited and SEBI-registered credit agency, Infomerics Valuation and Rating Private Limited saw its inception by eminent finance professionals and is now run under the leadership of Mr. Vipin Mallik. The credit bureau strives to offer an unbiased and detailed analysis and evaluation of credit worthiness to NBFCs, banks, corporates and small and medium scale units. It is through their rating and grading system that they determine the credit worthiness of an organisation. Infomerics helps in reducing any kind of information asymmetry amongst investors and lenders. Keeping transparency as it is core value, the credit bureau makes sure to deliver comprehensive and accurate reports and records of all their clients.

India Rating and Research Pvt. Ltd

India Ratings is a wholly-owned subsidiary of the Fitch Group. It offers credit ratings for insurance companies, banks, corporate issuers, project finance, financial institutions, finance and leasing companies, managed funds, and urban local bodies. In addition to SEBI, the company is recognised by the Reserve Bank of India and National Housing Bank.

Credit Analysis and Research limited (CARE)

Launched in 1993, CARE offers credit rating services to areas such as corporate governance, debt ratings, financial sector, bank loan ratings, issuer ratings, recovery ratings, and infrastructure ratings. Headquartered in Mumbai, CARE offers two different categories of bank loan ratings, long-term and short-term debt instruments. The company also offers ratings for Initial Public Offerings (IPOs), real estate, renewable energy service companies (RESCO), financial assessment of shipyards, Energy service companies (ESCO) grades various courses of educational institutions. CARE Ratings has also ventured into valuation services and offers valuation of equity, debt instruments, and market linked debentures. Moreover, the company has launched a new international credit rating agency ‘ARC Ratings’ by teaming up with four partners from South Africa Brazil, Portugal, and Malaysia. ARC Ratings has commenced operations and completed sovereign ratings of countries, including India.

Credit Rating Information Services of India Limited (CRISIL)

CRISIL is one of the oldest credit rating agencies in India. It was launched in the country in 1987 following which the company went public in 1993. Headquartered in Mumbai, CRISIL ventured into infrastructure rating in 2016 and completed 30 years in 2017. CRISIL acquired 8.9% stake in CARE credit rating agency in 2017. It launched India’s first index to benchmark performance of investments of foreign portfolio investors (FPI) in the fixed-income market, in the rupee as well as dollar version in 2018. The company’s portfolio includes, mutual funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL coalition index and so on.

Acuite Ratings & Research Limited

Acuité Ratings & Research Limited is a full-service Credit Rating Agency registered with the Securities and Exchange Board of India (SEBI). The company received RBI Accreditation as an External Credit Assessment Institution (ECAI), for Bank Loan Ratings under BASEL-II norms in the year 2012. Since then, it has assigned more than 8,300 credit ratings to various securities, debt instruments and bank facilities of entities spread across the country and section of industries. It has its Registered and Head Office in BKC, Mumbai.

Brickwork Ratings (BWR)

Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings for bank loans, SMEs, corporate governance rating, municipal corporation, capital market instrument, and financial institutions. It also grades NGOs, tourism, IPOs, real estate investments, hospitals, IREDA, educational institutions, MFI, and MNRE. Brickwork Ratings is recognised as external credit assessment agency (ECAI) by Reserve Bank of India (RBI) to carry out credit ratings in India.

ICRA Limited

ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The company was formerly known as Investment Information and Credit Rating Agency of India Limited. Before going public in April 2007, ICRA was a joint venture between Moody’s and several Indian financial and banking service organisations. The ICRA Group currently has four subsidiaries – Consulting and Analytics, Data Services and KPO, ICRA Lanka and ICRA Nepal. At present, Moody’s Investors Service, the international Credit Rating Agency, is ICRA’s largest shareholder. ICRA’s product portfolio includes rating for corporate debt, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME, market linked debentures and so on.

Limitations of Rating

Biased rating and misrepresentations:

In the absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no links with the company or the persons interested in the company so that the reports impartial and judicious recommendations for rating committee.

Concealment of material information:

Rating Company might conceal material information from the investigating team of the credit rating company. In such cases quality of rating suffers and renders the rating unreliable.

Human bias:

Finding off the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.

Down grade:

Once a company has been rated and if it is not able to maintain its working results and performance, credit rating agencies would review the grade and down grade the rating resulting into impairiring the image of the company.

Reflection of temporary adverse conditions:

Time factor affects’ rating, sometimes, misleading conclusions are derived. For example, company in a particular industry might be temporarily in adverse condition but it is given a low rating. This adversely affects the company’s interest.

Rating is no guarantee for soundness of company:

Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management. Independent views should be formed by the user public in general of the rating symbol.

Static study:

Rating is done on the present and the past historic data of the company and this is only a static study. Prediction of the company’s health through rating is momentary and anything can happen after assignment of rating symbols to the company.

Dependence for future results on the rating, therefore defeats the very purpose of risk indicativeness of rating. Many changes take place in economic environment, political situation, government policy framework which directly affect the working of a company.

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