MB – MODULE 3 NOTES

1. RTGS :
Significance
 This will facilitate innovations in the large value payments ecosystem and
promote ease of doing business.
 This will help in global integration of Indian financial markets and will
facilitate India’s efforts to develop international financial centres.
 With this, India will be one of the very few countries globally with a
24x7x365 large value real time payment system

Merits of RTGS

-Reduced settlement risk: The Real-Time Gross Settlement system reduces the
risk of settlement failure as money is transferred immediately

-Improved liquidity management: Real-Time Gross Settlement allows for

improved liquidity management as banks are able to better monitor their inflows
and outflows

-Increased transparency: Real-Time Gross Settlement increases the transparency

of the banking system as all transactions are recorded in real-time

-Improved customer service: Real-Time Gross Settlement improves customer

service as it allows for the quick and efficient transfer of funds

Demerits of RTGS

Increased cost: The Real-Time Gross Settlement system is more expensive than
other methods of transferring money, such as the Automated Clearing House
(ACH) system

-Risk of cyber-attack: The Real-Time Gross Settlement system is vulnerable to

cyber-attacks as it relies on computer systems to process transactions

-Limited hours of operation: The Real-Time Gross Settlement system is only

operational during certain hours of the day

-Restricted participants: The Real-Time Gross Settlement system is limited to

banks and other authorized financial institutions
 What Are the Different Modes for Initiating RTGS Transactions in India?

 Internet banking: Banks offer internet banking services that allow customers to
initiate RTGS transfers online. Users can log in to their internet banking
accounts and follow the steps provided by their bank to complete the RTGS
transaction.

 Mobile banking apps: Banks also provide mobile banking applications that
enable customers to perform RTGS transactions using their smartphones or
tablets. These appsw are user-friendly and convenient for on-the-go banking.

 Bank branch: Customers can visit their bank’s physical branch and request an
RTGS transfer in person. Bank staff will assist in processing the transaction and
ensure that all necessary details are provided.

2. NEFT :

Advantages of NEFT:

1. Convenience: NEFT allows individuals and businesses to transfer funds

electronically, eliminating the need for physical checks or cash. It can be done
from the comfort of your home or office using online banking or visiting a bank
branch.

2. Wide Availability: NEFT services are available across most banks and
branches in India, making it accessible to a large number of people.

3. Cost-Effective: NEFT transactions are generally cost-effective, with many

banks offering the service for free or at a nominal charge.

4. Security: NEFT transactions are secure, as they are conducted through the
banking system, which has robust security measures in place.

5. Timeliness: While not instant like RTGS, NEFT transfers are processed in
batches throughout the day, which still ensures relatively quick fund transfers
compared to traditional methods like checks.

Disadvantages of NEFT:
 1. Transaction Timing: NEFT transactions are not processed in real-time. They
are done in batches, which means there can be a delay in funds reaching the
recipient, especially if initiated after the cut-off time for a particular batch.

2. Transaction Limits: Some banks impose limits on the maximum amount that
can be transferred through NEFT in a single transaction, which may not be
suitable for very large transactions.

3. Service Hours: NEFT is not available 24/7. It operates during specific hours on
business days, so you cannot make transfers at any time of the day or on holidays.

4. Bank Charges: While many banks offer NEFT for free, some may charge fees
for NEFT transactions, especially if they involve larger amounts.

5. Not Ideal for Urgent Transactions: If you need to make an urgent payment,
NEFT might not be the best choice as it doesn’t provide the real-time settlement
that systems like RTGS offer.

2. Cryptocurrency
Definition of Cryptocurrency
In simplistic terms, Cryptocurrency is a digitised asset spread through multiple
computers in a shared network. The decentralised nature of this network shields them
from any control from government regulatory bodies.
The term “cryptocurrency in itself is derived from the encryption techniques used to
secure the network.
As per computer experts, any system that falls under the category of cryptocurrency
must meet the following requirements.:
 Absence of any centralised authority and is maintained through distributed
networks
 The system maintains records of cryptocurrency units and who owns them
 The system decides whether new units can be created and in case it does,
decided the origin and the ownership terms
 Ownership of cryptocurrency units can be proved exclusively
cryptographically.
  The system allows transactions to be performed in which ownership of the
cryptographic units is changed.

Types of Cryptocurrency
The first type of crypto currency was Bitcoin, which to this day remains the most-
used, valuable and popular. Along with Bitcoin, other alternative cryptocurrencies
with varying degrees of functions and specifications have been created. Some are
iterations of bitcoin while others have been created from the ground up
Bitcoin was launched in 2009 by an individual or group known by the pseudonym
“Satoshi Nakamoto. As of March 2021, there were over 18.6 million bitcoins in
circulation with a total market cap of around $927 billion.
1. The competing cryptocurrencies that were created as a result
of Bitcoin’s success are known as altcoins. Some of the well known altcoins
are as follows:
 Litecoin
 Peercoin
 Namecoin
 Ethereum
 Cardana

Cryptocurrency has the following advantages

 Funds transfer between two parties will be easy without the need of third party like
credit/debit cards or banks

 It is a cheaper alternative compared to other online transactions

 Payments are safe and secured and offer an unprecedented level of anonymity

 Modern cryptocurrency systems come with a user “wallet” or account address which
is accessible only by a public key and private key. The private key is only know to the
owner of the wallet

 Funds transfer are completed with minimal processing fees.

Cryptocurrencies have the following disadvantages.

  The almost hidden nature of cryptocurrency transactions makes them easy to be the
focus of illegal activities such as money laundering, tax-evasion and possibly even
terror-financing

 Payments are not irreversible

 Cryptocurrencies are not accepted everywhere and have limited value elsewhere

 There is concern that cryptocurrencies like Bitcoin are not rooted in any material
goods. Some research, however, has identified that the cost of producing a Bitcoin,
which requires an increasingly large amount of energy, is directly related to its market
price.

How Does Cryptocurrency Work?

 Transactions with cryptocurrency are recorded on a public digital

ledger called blockchain.

o This ledger is maintained by a network of computers around the world,

and each new transaction is verified and added to the blockchain by
these computers.

o This decentralization and use of cryptography make it difficult for

anyone to manipulate the currency or the transactions recorded on the
blockchain.

 To use cryptocurrency, individuals or businesses must first acquire a digital

wallet, which is a software program that stores the user's public and private
keys.

o These keys are used to send and receive cryptocurrency, and they are
also used to verify transactions on the blockchain.

 Users can acquire cryptocurrency through a process called "mining" which

involves using computer power to solve complex mathematical equations, which
validate and record transactions on the blockchain, in return for a certain amount
of cryptocurrency.

CIBIL SCORE
Refer notes in text and remaining are as follows

Four major factors that impact your CIBIL Score:

PAYMENT HISTORY: Your payment history is one of the factors that lenders consider
when determining your creditworthiness. It shows how consistently you have made your
payments on time and in full. Late payments, missed payments and delinquencies can
negatively impact your CIBIL Score.

CREDIT UTILISATION: Credit utilisation refers to the amount of available credit you're
using. Higher credit utilisation suggests you may be over-extended, making you appear to be
at credit risk to the lenders. Aim to keep your credit utilisation ratio well within your
available credit limit.

AGE OF CREDIT: The length of time you've held credit accounts (i.e. loan account, credit
card etc.). It shows lenders that you have a track record of managing credit responsibly over
time. A longer credit history is typically seen as a sign of stability and reliability.

CREDIT ENQUIRIES: When you apply for new credit, lenders will often check your credit
report to assess & onboard customers with a proven track record of making timely payments.
This can have a marginal impact on your CIBIL Score. Applying for credit, too frequently in
a short period of time can therefore negatively impact your CIBIL Score.

Five security issues in E – Banking

1. Using Unsecured Wi-Fi Connections

Most customers will revel in the idea of free Wi-Fi connections to surf the web on the same
PCs or mobiles with which they carry out electronic banking transactions. While the idea
might seem cost effective, it could actually cost the user more when trouble sets in.

2. Third Party Applications

This security challenge is more common in mobile banking. Usually, the banks instruct
customers to download official apps from their website or recommend a trusted supplier to
handle mobile application creation and control.
However, customers usually prefer to download these apps themselves from mobile app
stores, and this is a potential security breach that cybercriminals tend to exploit, always.

Hackers could create an exact replica of the apps, stock them up with malware and put it out
there for customers to download. These customers aren’t software or app developers, they
can’t tell which is secure, so they download and run into problems.

3. Phishing Attacks

Internet fraudsters use a process called phishing to obtain private information on their preys,
one that comes in handy when they wish to commit cyber atrocities. The phishing process
involves the distribution of email messages or links that look legitimate to recipients.

A click on such emails or links which might require you to part with private info is all that is
needed to attack a victim’s finances. Since most customers usually can’t tell which email is
from a trusted source or not; they are advised to apply discretion before clicking or open any
link sent to them. If you do not feel sure about a link or email, it is best to chuck it in the
spam folder of your email and contact your financial institution.

[Link] And Ransomware

Malware and ransomware attacks are among the most dangerous threats over the last couple
of years. The threat isn’t limited to financial services either, most industries are vulnerable to
malware and ransomware attacks. These destructive malware attacks are becoming more
common and more advanced

[Link]

Spoofing is similar to phishing but often more complex. There are a few types of spoofing
attacks, all utilizing some form of impersonation. Domain spoofing consists of creating a
fraudulent version of an actual domain meant to trick users into giving away login credentials
and personal information. This tactic bets on the likelihood that people will not look closely if
a website appears to be legitimate.

INFINET

It had been widely felt earlier that one of the biggest bottlenecks in the banking system in the
country was the lack of a system that ensures fast, safe and secure intra-bank and inter-
bank communication. Most of the cases of complaint against banks, in those days related to
the time taken for transfer of funds across banks and between cities and to the delays in the
collection of outstation cheques. Clearly, the non-availability of a reliable communication
backbone had been one of the main contributors to this state of affairs .The best solution in
the given circumstances therefore, was to center on the establishment of satellite based
network using VSAT technology. The decision to go in for VSAT technology was a deliberate
choice. For, without it, it would have been difficult to initiate the network, the Indian
Financial Network or INFINET as we have now called it.

About VSAT Technology

VSAT is an acronym for Very Small Aperture Terminal, but more simply put it describes a
small satellite terminal that can be used for one-way and/or interactive communications via
satellite. VSATs are a well-established telecoms solution, with more than 500,000 terminals
installed in more than 120 countries. But miniaturization of components and increased
economies of scale are lower costs still further, enabling service providers to offer an
increasing range of VSAT-based solutions, including rural telecoms, distance learning,
telemedicine, disaster recovery, offshore networks, as well as a host of corporate and
government applications.

INdian FInancial NETwork(INFINET)

INdian FInancial NETwork (INFINET) is the communication backbone for the Indian
Banking and Financial Sector. All Banks, Public Sector, Private Sector, Cooperative, etc., and
the premier Financial Institutions in the country are eligible to become members of the
INFINET. The INFINET is a Closed User Group (CUG) Network for the exclusive use of
Member Banks and Financial Institutions. It uses a blend of communication technologies
such as VSATs and Terrestrial Leased Lines. Presently, the network consists of over 950
VSATs located in 127 cities of the country and utilities one full transponder on INSAT 3B.

Inaugurated on June 19, 1999, various inter-bank and intra-bank applications ranging from
simple messaging, MIS, EFT (Retail), Electronic Clearing Service (ECS) for both Credits and
Debits, online dealing and trading in Government securities, Centralized Funds Management
System(CFMS) for Banks and FIs, Anywhere/Anytime Banking, Inter-Branch
Reconciliation, Structured Financial Messaging System (SFMS) and Real Time Gross
Settlement (RTGS) System are being implemented using the INFINET as the backbone

The VSAT network and the terrestrial Leased Line network of the INFINET will co-exist by
drawing from the strengths of each other. Now, the users have the facility of a dynamic option
to choose between these two networks depending upon the need, urgency, suitability, volume
of traffic, availability and accessibility

National Electronic Clearing Service (NECS)

NECS full form is National Electronic Clearing Service, which is an electronic payment
system introduced by the Reserve Bank of India for individuals, businesses, and other
organizations to make recurring payments such as utility bills, loan repayments, and
insurance premiums electronically on a regular basis

Uses of NECS

Here are a few uses of NECS:

 Allows individuals and businesses to make recurring electronic payments on a regular

basis.

 Aids in the automation of payment processes and the reduction of the need for manual
intervention

 Improves payment transaction efficiency and speed

 Reduces the possibility of payment processing errors and fraud.

 Utility bills, insurance premiums, loan repayments, and other regular payments are all
supported.

A few of the importance of NECS are as follows:

 It lowers the risk of payment processing errors and fraud.

 It gives customers a simple way to make recurring payments electronically on a

regular basis.

 Utility bills, insurance premiums, loan repayments, and other regular payments are all
supported by NECS.

 By encouraging the use of electronic payments, NECS is an important step toward

achieving a cashless economy.

CLASSIFICATION OF PSL ADVANCES

The classification of priority sector advances is as follows:

Agriculture

- Direct Agriculture : Loans to individual farmers, Self-Help Groups (SHGs), and Joint
Liability Groups (JLGs) for crop production, farm equipment, and irrigation.

- Indirect Agriculture: Loans to companies and organizations involved in agriculture-related

activities, such as storage facilities, purchase of agri-inputs, and allied activities like dairy,
poultry, or fisheries.

2. **Micro, Small, and Medium Enterprises (MSMEs)**

- **Manufacturing and Service Enterprises**: Loans to MSMEs as defined under the

MSME Act based on investment in plant/machinery and turnover.

- **Micro Enterprises**: A portion of lending is earmarked specifically for micro-

enterprises.

- **Startups**: Lending to innovative businesses that meet the MSME criteria.

### 3. **Export Credit**

- Loans to exporters for financing pre-shipment and post-shipment activities.

- Exporters engaged in priority sector activities are given preference.

4. **Education**

- Loans to individuals for educational purposes, including vocational courses, both within
India and abroad, subject to specified limits

### 5. **Housing**

- Loans for construction or purchase of houses up to a certain limit.

- Support for slum redevelopment and affordable housing projects under government
schemes.

6. **Social Infrastructure**

- Loans for projects related to schools, healthcare facilities, drinking water supply,
sanitation, and renewable energy infrastructure in rural and underserved areas

### 7. **Renewable Energy**

 - Loans to individuals and enterprises for solar panels, windmills, and other non-
conventional energy sources, up to specified limits.

### 8. **Weaker Sections**

- Lending to economically and socially disadvantaged groups, including small and marginal
farmers, artisans, scheduled castes (SCs), scheduled tribes (STs), and low-income individuals.

FARM LOANS

Farm loans are financial assistance given to farmers for agricultural activities, and can be
used for a variety of purposes, including:

 Crop loans

Also known as Kisan Credit Cards, these loans are used for short-term expenses during the
cultivation season, such as purchasing seeds, fertilizers, and pesticides. The government
offers these loans at subsidized interest rates, and banks also provide them based on
creditworthiness and landholding.

 Farm mechanization loans

These loans can be used to purchase, repair, or replace farm machinery, such as tractors and
harvesters. Some banks offer general-purpose loans, while others categorize them by intended
function.

 Agriculture term loans

These long-term loans can be used for non-seasonal expenses, such as purchasing or
upgrading machinery, installing solar power, or windmills. Repayment periods can be up to 4
years.

 Solar pump set loans

These loans are used to purchase photovoltaic pumping systems for small irrigation
projects. They are usually long-term loans with repayment periods of up to 10 years.

 Agricultural gold loans

These loans are secured against gold ornaments pledged as collateral. They can be used for
agricultural expenses, as well as dairy, poultry, and fisheries.
VALUE ADDED SERVICES

1. Financial advisory services involve professional guidance and assistance

provided by experts to individuals, businesses, or organizations to help them
manage their finances effectively and achieve their financial goals. Examples ;
retirement planning , investment planning, wealth planning etc
2. Mobile apps : various mobile applications are also provided by the banks
to their customers for easier bank transcations . Ex: Yono by SBI ,
FedBook by Federal bank
3. ATMs : Automated teller machines sevices are also provided by the
banks . atms are kept in busy places so that people can have better access
to its facilities
4. Portfolio diversification : refers to the guidance and tools provided by
banks to help clients create investment portfolios that spread risk across
various asset classes, sectors, geographies, or instruments. It ensures that
clients' investments are balanced and optimized for potential returns
while minimizing exposure to specific risks
5. Locker facilty
6. Biometric security
7. Mobile wallets