Understanding Bank NPAs

“Reserve Bank extends EMI Holiday” screamed the newspaper early in the morning of 22^nd November 2016, amidst those chaotic days of Rs.500 & Rs.1000 "demonetization". “RBI allows both individuals and firms with loans upto Rs. 1 crore an additional grace period of 60 days to repay dues”, said the paper.

...except that there was never any EMI holiday

“Demonetization: RBI gives small borrowers 60 extra days to repay credit”, said another - a leading financial daily, “…small borrowers who have been facing the brunt of demonetization, would get an additional 60 days to repay their credit, including agriculture and housing loans”.

Similar reports were carried by most newspapers that day, and repeated ad nauseum by television channels for several days thereafter. There was however one small problem – the news was completely wrong.

Most media houses wrongly reported the news

What RBI had said

What then had caused the press to report something like this, which wasn’t true at all? The answer to this lay in a circular issued by the Reserve Bank of India, put up on its website the previous day. The circular, titled “Relaxation in Prudential Norms”, said “…it has been decided to provide an additional 60 days beyond what is applicable for the concerned regulated entity(RE) for recognition of a loan account as substandard in the following cases…” and cited a wide gamut of loan accounts where this benefit will be applicable. Read the full circular here.

The operative term here is ‘additional 60 days…for recognition of a loan account as substandard’ which was misinterpreted to mean borrowers getting an extra 60 days to repay their EMIs or other dues. In fact, the RBI circular clearly mentioned “…this is a short-term deferment of classification…” and that this “…does not result in restructuring of the loans”. Shorn of its jargon, this means there is no change in dates when the borrowers have to repay, but if they do not, banks can have an additional 60 days to do what they do when the borrowers do not repay.

Understanding NPAs

News reporters and financial journalists aside, I have seen even analysts tracking the banking sector struggle with these terms. When banks give loans, the loans appear on the asset side of a Balance Sheet. A repayment goes on to reduce that asset, while a fresh disbursement increases these assets. However, not all loans get fully repaid, and occasionally a customer defaults. This leads to a capital loss for the bank, as the assets have to be written off. To an extent, such losses are considered ‘normal’ in the banking business, and prudence requires that banks prepare for them well in advance. This is where ‘provisioning’ comes in.

Provisioning means banks booking an ‘expense’ entry in the Profit & Loss account based on the expected losses arising from such defaults. Provisioning reduces reported profits of the bank and creates a capital buffer, which can be used when the losses actually occur. The amount of provisioning to be done is prescribed by the RBI, and depends on the ‘quality’ of the asset. The worse the quality, higher the provisioning, since lower are the chances you will ever recover your money.

Asset Classification

This is where ‘Asset Classification’ comes in. RBI requires banks to classify all loans in four groups – Standard, Sub-standard, Doubtful and Loss. Initially, all loans start as ‘Standard’. Assets under the other three categories are collectively called “Non-Performing Assets” or NPAs. NPAs are loans where principal or interest has not been received for more than 90 days beyond its due date. The RBI defines ‘Sub-standard’ as an asset which has remained an NPA for a period less than or equal to 12 months. After 12 months as an NPA, the asset degrades to ‘Doubtful’. ‘Loss’ assets are assets where the bank feels there is no hope of recovery from the customer at all. If an EMI was due on 5^th February 2017 and the customer failed to pay, the loan would become ‘sub-standard’ on 6^th May 2017 (i.e. 90 days after this date). Twelve months after this date i.e. from 6^th May 2018 onwards, the loan will be called a ‘Doubtful’ asset.

Note the following peculiarities in this:

1.       A loan does not become an NPA immediately after default. For 90 days, it continues as a ‘Standard’ asset, though conventionally one is inclined to equate 'standard’ assets as those where the customers are repaying on time. Thus, given that demonetization was announced on the evening of 8^th November 2016, even an asset due on 9^th November and remaining in default would not become an NPA on 31^st December 2016. And this even without taking recourse to the extra 60 days provided by the above circular.

2.       There is no hard & fast definition of a ‘Loss’ asset, it is based on a subjective assessment of the bank about the recoverability of the loan. In theory, a loan may continue to be classified as ‘Doubtful’ for several years after default, without ever being moved to ‘Loss’.

Why this classification matters is that the ‘provisioning’ banks are required to do – which, as we saw is an ‘expense’ and hits the bank’s profitability - depend on the category of the loan, progressively increasing as the loan moves down the quality lane from Sub-standard to Doubtful and Doubtful to Loss. RBI even requires banks to make provisioning on Standard assets.

Gross & Net NPAs

When banks declare their financial results, the 'Gross NPA’ and ‘Net NPA’ levels of the bank receive a lot of attention. The summation of assets under the category Sub-standard, Doubtful and Loss – are called the ‘Gross NPA’ of the bank. If you deduct the amount of provisioning done from the Gross NPA, the resultant figure is the ‘Net NPA’ of the bank. But we have seen above that provisioning is an arbitrary number – partly driven by a regulatory minimum, partly driven by the bank’s own discretion. This makes 'Net NPA’ also an arbitrary number. ‘Gross NPA’ however is a much more tangible number – it tells precisely the amount of loans overdue by 90 days or more. There is no subjectivity around it.

The NPA figures are often quoted in terms of percentages. When bank results are declared at the end of every quarter, analysts look at the ratios ‘Gross NPA %’ and ‘Net NPA %’ to determine the quality of bank's assets. Gross NPA % is calculated as ‘Gross NPA of the bank (as described earlier) divided by standard advances plus the gross NPAs’ of the bank i.e. effectively the sum of all loans outstanding as on the date of calculation. Net NPA% is calculated as the ‘Net NPA of the bank (as described earlier) divided by net advances’ i.e. sum of all loans outstanding less the provisioning for NPAs.

Note that only the absolute change in the Gross NPA comes close to showing the true movement of NPAs of the bank. And that too, with the lag of one quarter! That is, Gross NPA as of end-December minus the Gross NPA as of end-September will account for fresh defaults that have taken place in the July to September - and not the October to December - quarter! Net NPAs are distorted by provisioning, and both the ‘percentage ratios’ (Gross NPA% and Net NPA %) are distorted by the denominator. A bank can issue fresh imprudent loans and inflate the denominator, thus showing low NPA%. These fresh loans would become NPAs earliest only in the next quarter because of the 90-day rule.

It’s not over yet. There are write-offs too!

Even difference in Gross non performing assets doesn’t tell the full story of bank’s NPA movement. NPAs are further impacted by the assets “written off” during the period. And this figure may only be available from the Annual Report once a year. Written off assets are reversed completely from the asset book, reducing the Gross NPAs of the bank and the overall asset base itself.

Coming back to RBI circular mentioned earlier, all that the RBI said was that for loans with due dates between 1^st November 2016 to 31^st December 2016; banks have an extra 60 days – beyond the normal 90 - to recognize them as NPAs. They would become NPAs only if they remain unpaid for 150 days after the due date i.e. between 30^th March 2017 to 31^st May 2017 respectively, instead of 30^th Jan 2017 to 31^st March 2017. The asset classification and the amount of provisioning the banks have to do, would be guided accordingly.

As far as the borrowers are concerned, there was no change in their obligations to the bank; their due dates remained the same. There was no “EMI holiday” nor any “extra 60 days” to repay their credit.

The misleading debate on bringing back Black Money

Imagine this.

Journalists & cameramen have assembled in large numbers at the Delhi’s Indira Gandhi International Airport, eagerly awaiting the arrival of an incoming Air India flight. The flight arrives, and a triumphant Arun Jaitley, India’s Finance Minister steps out of the aircraft, flanked by top Finance Ministry officials. He is carrying two large suitcases in his hands. For a moment, he puts the suitcases down and waves to the waiting media. Everyone knows what’s in those bags. The reporters just cannot wait to ask him some questions. The moment has arrived. Yoga guru Baba Ramdev is among the first to issue a congratulatory tweet to the NDA government. Prime Minister Narendra Modi proudly proclaims that his government has completed an electoral promise made to the nation. The black money stashed abroad by unscrupulous Indians in Swiss banks has finally been brought back!

If this is your visualization of the moment when India is going to get back its promised “black money” from Swiss banks, this write-up is going to disappoint you. But the media coverage of the black money issue has been so wanting in depth, and so mired in meaningless sensationalism, that the aam aadmi may be forgiven for thinking something similar is going to happen one day. The manna from Switzerland is bound to arrive. After all, wasn’t it part of the “Achche Din” package?

In this article, I put in perspective a few thoughts on this much debated topic which seem sorely missing from the mainstream discourse.

The color of “Black Money”

I have found most discussion on the black money issue, such as this or this or this or this center around tax evasion. Businessmen make profits on which they do not pay tax, the money is secretly moved to some bank in Switzerland. This money needs to be brought back as the country is losing out on tax revenue. This is the standard narrative of black money that is dished out to the aam aadmi. 

However, this is far from the truth. Tax evasion is only a part of the problem.

Proceeds of crime

A large part of the money stashed abroad illegally is, what is termed in banking parlance as “proceeds of crime”. It owes its origin to criminal activities like corruption, misappropriation of government funds, fraud, cheating, or activities of underworld gangs, drug mafias and terrorists. The entire wealth accumulated though criminal activities is illegal and liable for confiscation. The account owners are liable for criminal prosecution. Here, the question of tax assessment, payment of penalties or even amnesty (as suggested by some), does not crop up at all. Simply speaking, if I steal Rs.100 from you and hide it under the carpet, the problem is not that I have not paid Rs.30 of tax, the problem is that I have stolen Rs.100. No government in its right senses can regularize this wealth on payment of tax.

Most discourse on black money conveniently skips this angle.

Under-invoicing of exports and over-invoicing of imports is a standard mode of laundering money abroad

Where is the money?

A common misconception that people seem to have is that the money is lying in some (Swiss, mostly) bank account. But is it there really? Do you really believe that someone stashing millions of dollars of stolen money would keep it in a bank account for years together for everyone to see? 

Obviously, the money has already been used up – to buy villas and yachts and Ferraris, to invest in Hedge Funds or Private Equity, to buy Soccer Clubs or Formula One teams, to purchase hotels, farmland or commercial property, to invest in shares or pay back loans! Even the returns generated from these would have been further used in payment of dividend, for business or further investments. It is nearly impossible to “bring back” the money the way most people seem to think about it.

Most of the government’s efforts on this issue has centered on enabling sharing of information with foreign governments or banks involved. Even if that is accomplished, all that a bank can share is a statement of account, many of them in benaami names or shell companies. The statement would contain inflows & outflows, but actually getting the money back is a different ball game altogether. In this era of electronic transfer, when money can be moved from one corner of the world to another in a matter of seconds, we can never get anything in a foreign bank to confiscate. No government, following its “due procedure” can ever move faster than the account holder himself and ‘catch’ the money in a foreign bank before it moves out.

Black money once “created”, is simply impossible to “bring back”, at least in the manner in which it is being made out to be. Its better the people face this reality and temper their expectations, no matter how noble the intentions of the authorities may be.

How big is the problem

There is no doubt that the extent of the problem is humungous and needs to be tackled on a war footing. For example, illicit capital flowing out of India over a 10-year period from 2003 to 2012 has been estimated to be higher than the country's total income tax collection during the period itself. While everyone agrees that the menace needs to be curbed, solutions are difficult to come by. Combating the problem requires negotiating a complex maze of financial regulations and international diplomacy. Though Switzerland has received the most media attention, it is not the only “tax haven” where such funds are being siphoned off, there are several others. (For example, Tax Justice Network lists out 73 such jurisdictions).

In 2007, evidence of deposits of more than US $ 8 billion surfaced in the UBS Zurich accounts of Hassan Ali Khan alone. The inaction of the Manmohan “Sin” Government in cases such as these led to the landmark Supreme Court order in July 2011 forming a Special Investigation Team (SIT) to investigate and bring back black money. The SIT was formed immediately after Narendra Modi government took charge in May 2014.

The landmark Supreme Court order forming the SIT came in a case filed by Ram Jethmalani & Others

The SIT on black money

The Terms of Reference of the SIT (available here) are wide and far-reaching. The SIT is charged with the responsibility and duty to investigate and prosecute all instances of stashing of unaccounted money in foreign bank accounts, investigate and prosecute activities which are the source of such money and to prepare an action plan for the future. The SIT is headed by former Supreme Court judges and has heads of virtually all national investigating agencies such as IB, RAW, CBI, ED, DRI, NCB, FIU etc as its members. It reports directly to the Supreme Court. All organs of the Central and all State governments, such as agencies, departments, constitutional bodies etc have been ordered to co-operate with the SIT. The SIT is also empowered to re-open past cases where investigations have been completed and charge-sheets filed.

Effectively, the issue of black money stashed abroad is now outside executive control and owned by the SIT. It is the SIT that has to deliver concrete results, not just in terms of giving recommendations for the future (which is the easy part) to pre-empt generation & stashing away of money, but actually getting back what has been lost and prosecuting those involved. The SIT report is awaited. But it is pertinent to note that even the ToR of the SIT or the Supreme Court order which led to its formation (available here) does not specifically charge it with "bringing back" the siphoned off money.

What can be done

Clearly, the fight against black money needs dramatic solutions and out-of-the-box thinking. Suggestions such as banking transaction taxes, annulment of high value notes, stringent regulations and even amnesty schemes have been suggested from time to time. While each of them have their own merits and demerits, the one I have found the most actionable has come from “super spy” Ajit Doval, presently the India's National Security Advisor. In a blog post in 2011, Doval writes:

"...India must pass a penal law declaring itself as the sole owner and beneficiary of all Indian monies, assets and bank accounts held abroad by or the dependents of Indian nationals without due declarations to the Indian authorities. On the strength of such a law, the Government of India can ask world governments and foreign banks to recognize Indian government as the beneficiary of undeclared wealth and freeze the accounts till owners of the wealth are able to prove that they had acquired it by fair means and from legally valid sources....

...Government of India should register an omnibus criminal case against suspected unidentified persons who have been indulging in criminal activities and unauthorizedly transferring money to tax havens abroad.  This would enable the Government to get assistance of foreign police and investigating agencies for gathering evidence and information. It will empower the government to approach different banks abroad, as also the concerned governments, for information regarding the money trail as they pertain to criminal cases..."

In other words, we should "nationalize" all such assets lying outside India and put the onus on their owners to prove that the assets are legitimate. 

When it comes to recovering what has already been plundered, only such drastic solutions can give some decent results. Even then, we can only hope to recover only a part of the stolen wealth, nothing more can be expected.

The economic solution

Enforcement and policing is never a sound and harmonious solution. For that, the problem has to be pre-empted.

Tax rates have to be kept as low as possible, so that tax avoidance ceases to be profitable. This means the government keeps its expenses as low. The government should withdraw from economic activities, restricting itself to the bare minimum such as maintenance of law & order and running the judicial system. This reduces the scope for bribery and crony capitalism. In India, much illicit wealth has been generated from bribes paid to twist policies or government decisions. Scope for discretionary decision making aids corruption.

Global economies are slowing, and profitable investment opportunities are shrinking abroad. India is among the fastest growing economies in the world today. If business climate in India is improved, incentive to retain money abroad reduces. This again calls for dismantling bureaucratic controls, improving the rule of law and installing a quick and efficient grievance redressal system.

Despite all this, a few black sheep will still exist. For them heavy penalty should await. Investigations should be fast, and justice delivery certain. Police and judicial reforms therefore should be on top of the government's agenda.

If all this is done, the problem of “black money stashed abroad” can be mitigated. But for now, the suitcases Mr. Jaitley would be carrying are likely to be largely empty.

A bridge to nowhere

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." The central bank, of course has other functions in addition to this, such as the manager of foreign exchange, acting as the banker to the government and a lender of the last resort to the banking system. Maintaining price stability however, has always been seen as the primary objective of any Central Bank in the world. As the incumbent Governor of the Reserve Bank Dr. D. Subbarao prepares to demit office after an eventful tenure, I took a look at his monetary policy actions and the impact they have had on some key indicators in the country.

Subbarao’s tenure at the Reserve Bank has been one of the most challenging of any RBI Governor’s in recent times. Within days of his taking office, financial crises struck the economies of the West. Giant institutions collapsed.  Credit markets froze. World trade came almost to a halt. Stock markets crashed. Commodities plunged. The recession that followed in the U.S. and Europe has been described as the worst since the Great Depression of 1932. Though not a direct party to the tumultuous events unfolding in the developed world, a rub-off effect on India was inevitable.

Subbarao’s tenure has also coincided with a leadership crisis at the centre in New Delhi. In the last few years, a profligate UPA-II sunk itself neck deep in corruption, mega scams hit the headlines, crony capitalism peaked, “policy paralysis” became the buzzword and economic reforms that started in the 1990s reversed, ironically by the same man who was hailed as the architect of those reforms earlier. A welfare state has emerged.

In such an environment, managing the country's monetary policy can be no easy task. The policy under Subbarao followed alternate bouts of easing and tightening liquidity in 'baby steps' of 0.25 to 0.50 percent each at intervals of a few months at a time.

Phase	Over a period	Action
Eased liquidity, lowered rates	Oct 08 – Feb 10	Reduced CRR by 4 % Reduced Repo by 4.25 %, Reverse Repo rate by 2.75 %
Squeezed liquidity, raised rates	Feb 10 – Jan 12	Raised CRR by 1 % Raised Repo, Reverse Repo rate by 3.50 %
Eased liquidity, lowered rates	Jan 12 – May 13	Reduced CRR by 2% Reduced Repo, Reverse Repo rate by 1.25 %

What effect, if any, have these steps had on the key indicators stated while embarking on these policy actions? Let us take a look at some of them

Consumer prices have risen more than 50 % in less than five years

Consumer prices have risen continuously, at almost a uniform rate in the last five years. Between October 2008 and June 2013, prices (as indicated by CPI-IW) are up more than 50 % i.e. more than ten percent per annum compounded. Whether Subbarao was tightening credit or easing liquidity, it has clearly had little impact on consumer prices. 

The Rupee has depreciated from Rs. 48 to a $ to Rs. 65 in less than 5 years 

After an initial period of stability, the currency has collapsed. Especially from August 2011 when it was trading at Rs.45, it has been a one way street for the Indian Rupee, trading at around Rs. 65 to a dollar at the time of this writing. It is instructive to note that the Rupee broke its long term trading range (between Rs.45 to 50) in end-2011, when it was clear that the tightening cycle has ended and rates would be lowered going forward. Subbarao reversed the rate cycle with a CRR cut in January 2012.

Industrial production has gone nowhere in the last three years

If the rationale for cutting interest rates starting January 2012 was to promote industrial growth, it has clearly not worked. The Index of Industrial Production has gone nowhere in the last three and a half years - it stood at 163.60 in January 2010 and stands at 164.3 in June 2013. Whether Subbarao was raising rates or lowering them, industry has stagnated. 

In retrospect, vacillating between the demand from industry for lower interest rates and the imperative to tame inflation, monetary policy went nowhere under Subbarao. The cycle of liquidity tightening was abandoned abruptly in January 2012, ostensibly under the pretext of taming inflation. But even the meager mitigation in wholesale inflation rate never reached the end consumers. By lowering interest rates too early, Subbarao clearly jumped the gun, aiding, if not entirely causing the currency collapse. 

A prolonged period of negative interest rates is the primary cause of India’s financial crisis today. Negative interest rates promote investment in hard assets like gold and real estate at the cost of financial assets. Negative interest rates induce excessive borrowing and investment in unviable projects. Negative interest rates cause a flight of capital and depreciate the currency. The high inflation in recent years, and the sharp depreciation of the Rupee is a direct consequence of the RBI’s reluctance to raise rates when the situation demanded. A hawkish RBI is necessary to counter government profligacy.

Ironically, and unfortunately, Subbarao has been blamed for precisely the opposite – for not lowering rates enough. In the media, he is often portrayed as the one taking on the mandarins of the North Block, on issues ranging from interest rates reduction to new bank licences. But the symptoms of the current crisis - high inflation and a depreciating currency - prove that interest rates need to be higher and not lower than what they are. Subbarao probably knew this, but in the wake of the misleading clamor for reducing rates from the industry, politicians, influential economists and the media, could not stand up to his beliefs with conviction. In the end, his policy actions could neither control inflation nor promote growth.

Subbarao took office in the midst of a global crisis. He is now leaving in the midst of a domestic one.

(Also read a related article here)

Future of Banking - Part II

In the previous article (click here), we saw some of the trends that are sweeping across the world of banking technology today. These changes will revolutionize the way we bank in future. We continue from where we left off, covering new developments, this time mainly in Corporate Banking.

7. Remote Deposit Capture: In the U.S., banks now supply a scanner which their business customers use to scan the cheques they receive. The images are then uploaded to a bank portal, from where the image is directly sent to the clearing house for clearing. 

Individual customers can photograph a cheque they have received using their Smartphone, and automatically upload the image through an app to the bank’s portal, which sends it online for clearing. No need to go to the bank to deposit the cheque at all! This development is specific to the U.S., since a special Act ensures legal validity of the cheque thus deposited electronically.

8. The end of L/C: Letters of Credit have been at the heart of world trade for decades, but they would soon be history. ICC (International Chamber of Commerce, the body which regulates world trade) is in the process of giving recognition to a new instrument called the Bank Payment Obligation (BPO) which will one day replace the L/C. The BPO can be exchanged between banks via XML messages and incorporated into an automated STP (Straight Through Processing) environment, causing substantial cost reduction and bringing operational efficiency.

9. Automation of Supply Chain Finance: Soon, Corporate buyers will receive quotations, select suppliers, place orders, receive bills and make payments directly through their bank’s portal. Sellers can bid for tenders, accept orders and raise invoices online, through their bank's portal, without handling any paper. This is much more than simply scanning a physical invoice or any other commercial document – the system will generate its own serial number, have digital signature etc and be a legally binding document without any physical existence. Further more; the Bank’s Core systems will be integrated with the Corporate ERP systems, making communication between the two entirely automated.

Automation of the Supply Chain will save billions of dollars across the world and prevent millions of trees from being cut. The BPO, and Supply Chain Automation taken together will completely revolutionize the way corporate financing is done by banks in the world today.

10. eBAM (Electronic Bank Account Management): Can you imagine how many bank accounts a large corporation such as McDonald’s or General Electric might have? Could be in thousands. Managing so many bank accounts – opening, closing, keeping the list of signatories and their operating mandates updated, efficiently utilizing the funds lying around in them, sending instructions of various types to the banks and following up with them is a mammoth task. eBAM, a product launched by SWIFT allows a company to open accounts, add or remove signatories and close accounts online without any manual intervention. Since transactions (i.e. sending and receiving money) have already moved online, once Banks perform the mandatory KYC (Know Your Customer) exercise and establish a relationship, a Corporate customer can open accounts, operate them and close accounts when the purpose is over, all by itself, without any manual intervention by the bank 

To conclude, Banking will look very different from the way it looks today. Plastic cards and cheque books will cease to exist, you will not need to know what your account number is. Mobile phone based payment systems will make physical currency become redundant, and offices will become truly paperless!

Apple’s iPhone is hardly four years old, but in such a short span of time it has turned the world of mobile telephony upside down. Developments which are at a conception stage will become mainstream tomorrow, and that day is not far away!

Future of Banking: Top trends that will drive the change

It is too clichéd to use the term “change is the only constant”, but nowhere is this truer than in the field of technology. In this 2-part article, I bring to you some recent technological developments in the field of banking that will change the way we do our banking forever: 

1. Biometric ATMs: If my fingerprint or iris scan is enough to identify me, do I need a plastic card? A bank in Turkey has rolled out 2400 biometric ATMs across the country. Japan already has a huge network of such ATMs operational, all of them based on the “finger vein” technology of Hitachi. Under this technology, rays of light pass through your fingers and capture pattern of the veins. The pattern is image processed using a special algorithm and digital data is generated. Pattern readers installed at ATMs read customer’s vein pattern and by comparing it with what is already present with the bank, a customer is identified. Hitachi claims finger vein technology is more reliable than using fingerprints, since the veins are inside the body and hence completely tamperproof. 

And if ATMs can have vein readers, will POS Terminals (those ubiquitous swipe machines where they swipe your credit card) be far behind? Plastic cards may soon be history. 

2. The "Pingit": You can now send money to anyone using only his mobile number, no need to know the account number! A common database, operated by a central body such as a Clearing House, will hold a “mapping” of the customer’s phone number to the account number. A simple mobile phone app will allow users to transfer money from their bank accounts to another just by entering the recipient’s phone number or selecting the name from address book. Payment instruction will be routed to this common database which will identify the account number to be credited. This development will substantially reduce the need to carry cash, even more than what the advent plastic cards did. (“Pingit” here is actually the brand name of such a service launched by Barclays in the U.K, others may launch it with a different name).

3. The e-Wallet: A “digital” wallet, stores all the data about your credit cards, prepaid cards etc digitally, which you can access online or through your mobile phone. When you shop, you just tap the phone on the wallet “reader” installed with the merchant and the transaction is authenticated automatically. The communication between your phone and the merchant’s reader happens over an electro magnetic field (somewhat akin to Bluetooth). 

To use the e-wallet online, once you have selected the items you want to buy and move to the payment options, just sign-in into your e-wallet account and the transaction is completed instantly using credit card data mapped within the wallet. Digital wallets are considered safer than leather wallets and credit cards, which can be stolen and misused. Banks will soon stop issuing physical cards completely, since only the data on the card is required, not the physical card itself. If the same data can be stored on your mobile phone, do you need a plastic card?

4. The Social Networking bank: Last year, Facebook got 15% of its $ 3.7 billion revenues from Payments business. It has already got ‘money transmitter’ licenses in 15 U.S. states, and is applying for more. This way, it is directly competing with Banks and money transfer companies like Western Union in the remittance business. In India, ICICI Bank allows customers to perform transactions like checking your account balance, generate statement and order cheque books through Facebook. Social Networking sites will give serious competition to Banks for certain types of services in the future, as it will not be necessary to visit the bank website to operate your account!

5. The end of Cheque Book: Europe has already done away with cheque books. Even in the rest of the world, cheque book usage is declining. And with the payment revolution brought about by the mobile phone hitting the banking world like a Tsunami, cheque books will soon be a thing of the past.

6. Bank Account portability: Regulators have been talking about Account Number Portability (“change your bank without changing your account number”) for a long time, but it is difficult to introduce and expensive to implement. Thankfully, with the cheque books gone, account numbers will die too! Or atleast, the way we see them today.   

A central body, such as a Clearing House will hold the “mapping” of a customer’s old account number to the new account number, and any mandate to debit or credit the old account (such as direct debit / credits, ECS mandates, RTGS, NEFT transfers, standing instructions and all sort of Electronic Fund Transfers whichever way they are done) will be automatically routed to the new account. Changing your bank will then become completely hassle free, reducing bank account to a commodity.

(To be continued…….)