There is a huge difference between Chit Funds and Ponzi Schemes, they are both very different concepts and they shouldn’t be thought of as alike.

Chit Funds or Chitty is a kind of a savings deposits which is done by a group of people. The concept is very similar to Kitty Parties which are are organised by women to save some money for a particular community project. These chit funds can be managed by registered companies or it can also be organised by a group of people like family and friends. All the Chit Fund activities are regulated by the Chit Fund Act, 1982. Apart from that the Chit Funds are to be regulated by the various State Governments by formulating their own Acts, like it has been done is Kerala, Tamil Nadu, Karnataka, etc.

The way the Chit Funds work is very simple. There are a group of people who all contribute a particular sum of money to the fund for a specified number of months. The people donate the money each month. Then every month there is lottery/auction and 1 person is chosen who gets the total money that has been pooled for that month. However, the person whose name comes in the lottery will not again get any money from the rest of the time period but will have to continue contribute his share of money for the rest of the time period. Its usually seen that the term period of the Chit fund is equal to the number of members in the Fund, so that each person has an equal chance of getting the money pooled. There is one person who organizes the Chit Funds every month and this person is also in-charge of conducting the lottery/auction.

So there is no surety of who will get the money at which month and there arises the main difference between Chit Funds and Ponzi Schemes.

Ponzi Schemes are basically structured in such a way that the money channeled from the investors go around and around in circles. This basically means that, the money collected from the investors are used to pay off the old investors. And the Ponzi Schemes basically function till the amount of money coming in from new investments is more than the money going out to pay the old investors. As long as this works the Ponzi Scheme can function and the day the chain is reversed is the day it goes bust.

Ponzi Schemes try to attract investors by offering very rate of returns, while Chit Funds don’t offer anything similar to this. Its basically a group of people contributing some amount of money each month and getting a lump sum amount in only one particular month.

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The main components under the Monetary Policy followed by the RBI are:

1. CRR- CRR or Cash Reserve Ratio. Under this policy, all scheduled commercial banks have to maintain a certain percentage of their total bank deposits as CRR. This amount of money has to be maintained in a current a/c with the RBI. This reserve is not kept by the bank but is maintained by the bank with the RBI. There is no upper or lower limit in the CRR ratio to be deiced by the RBI. The main aim of using CRR is to drain the excess liquidity out of the System. The present CRR is 4%.
2. SLR- SLR or Statutory Liquidity Ratio. Under this, all scheduled commercial banks have to maintain a certain percentage of their total time and demand liabilities as SLR before giving credit to any customer. The upper limit on SLR is 40%. This reserve has to be maintained in the form of gold or any other government approved security. This reserve has to be kept with the bank itself. However, all the banks have to periodically declare their SLR reserves to the RBI. The present SLR is 22%.
3. REPO RATE- This is an abbreviation for Repurchase Rate. This is the interest rate at which the RBI lends money to the bank in dire situations. This is now seen as the standard rate to be referred to, when trying to determine RBI’s future policies for the economy as this is now the standard rate with which RBI fights inflation. The present Repo rate is 8%.
4. REVERSE REPO RATE- This is completely the opposite of REPO rate. This is the interest rate at which Banks lend to the RBI. The is used by the RBI to control the money supply. The present Reverse REPO rate is 7%.
5. BANK RATE- This is also known as the Discount Rate. This is the rate at which the RBI lends money to the banks. Increase/Decrease in Bank rate affects the commercial banks lending rates which are then adjusted to this increase/decrease. The present Bank rate is 9%.
6. MSF- MSF or Marginal Standing Facility. This was a new measure introduced by the RBI in 2011. Under this, the banks could borrow money from the RBI at this rate, as a last resort when the banks exhaust all other borrowing options. The MSF rate is always fixed 100 Basis point(BPS) above the REPO rate (1 BPS is equal to 0.01%). The present MSF rate is 9%.

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The liquidity or the money supply in the economy is controlled by the RBI. The RBI decides on this policy after taking into consideration the current economic scenario and the what the future economic scenario of the country should be. This is very important considering the fact that, the money supply in the economy has far reaching consequences than what a normal man thinks it has.

The amount of money supply in the economy has its direct effect on the prices of the goods which are sold/bought in the economy. This is because of a very simple reason, the money supply is actually the amount of money a person has. So if a person has a lot more money then his demands for goods and services will increase. Which is very essential for the economy to function but excess demand lead to rise in prices or in technical terms, inflation. If the money market transactions continue to feed the inflation, in the long run its very harmful for the economy as it results in very high prices, reduction in demand, fall in the value of money  which in turn leads to more money supply which results in hyper-inflation and complete rundown of the economy. This is the reason why the RBI has such a stand against inflation and consider it to be Economy Finance Enemy No. 1. And it does everything possible to control the rate of inflation.

The main measures of the monetary policy followed by the RBI are:

1. CRR (CASH RESERVE RATIO)
2. SLR(STATUTORY LIQUIDITY RATIO)
3. REPO RATE
4. REVERSE REPO RATE
5. BANK RATE
6. MSF(MARGINAL STANDING FACILITY)

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In the advent of the 21st century, the way we normally make our payments are also evolving to make our life easier and our payment systems more secure.

Since the start of this century, we have seen that cashless transactions are slowly but surely becoming an important part if our payments structure.

The old daddy among them is the Cheque. They existed in some form from the Mauryan Age in India, however the Cheque’s we see now were formally introduced in India in 1770 by the Bank of Hindustan and the first act formulating the various nuances of the Cheque payment system was the Negotiable Instruments Act, 1881. The Cheque formed a major part of our cashless transactions in the 19th and 20th Century.

It was in the late 19th century that the new methods which facilitated cashless transactions were developed. The most prominent among them were the Debit and the Credit Cards. Though the debit cards were mainly introduced to make it easier for people to withdraw cash from the Automatic Teller Machine(ATM) and to reduce the pressure on Banks, but now with the Merchant Acquiring part of the network which facilitates these Cashless transactions getting better, banks have started offering various incentives for people who make their payments using their Debit or Credit Cards. Now, with RBI introducing India’s own domestic card scheme the ‘RuPay’ card, these segment is there to become bigger and more popular with the general public.

The Credit Card in India was introduced by the Central Bank of India. Though the credit card business in India is not as big as the other developed countries, the business is growing at a fast pace. According to the RBI, there were 18.8 million credit cards in the country at the end of November, 2013. HDFC Bank remained the largest issuer of credit cards with a base of 5.1 million cards.

The other important form of Cashless Transaction is Internet Banking. However, this is still in its nascent stage as to use these facility the e-commerce sites have to link up with banks and not all the e-commerce sites have tie-ups with all the banks so some customers lose out.

However, to remove this shortcoming the RBI has formed a committee under Prof. Umesh Bellur to look into a possibility of a centralized bill payment system, where the customers can pay their various bills from anywhere and anytime they want. The name of the committee is the GIRO (Government Internal Revenue Order) Advisory Committee. And, the committee has submitted its report which says that a tiered structure the Bharat Bill Payment System(BBPS) will be created to facilitate this.

Another, notable form of Cashless Transaction is Mobile Banking.

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This is the new kid in the block.

Bitcoins are a form of cyber currency which provides the owner the opportunity to make transactions anonymously. This is a form of currency which does not exist in the real world and it exists in the virtual world in the form of gold coins. These coins can only be mined by solving very hard mathematical problems. These coins are controlled by the network and the government has no role in its formation and transactions.

The programming of the Bitcoins is such that the circulation will not exceed more than 21 million and the limit will be reached in 2140. After, 2140 if anyone transacts in Bitcoins the network will automatically reject it as fake.

To own the bitcoins first a wallet has to be created in sites like Blockchain.info, then the person ha to pay some hard currency to get them. The bitcoins can be stored in the wallet and later sold. One of the biggest advantages of these coins is that they can’t be duplicated as the network will automatically detect it. This works on a peer-to-peer payment system.

The inventor of this unique system of payments is person with the pseudonym Satoshi Nakamoto.

This concept first appeared in a academic paper in 2008 but it took time before the concept took off.

The people are accepting this form of payments because others accept it to.

At present, the price of 1 bitcoin has rocketed to 900$/coin from 1$/coin as a lot of people want a share of the pie for the purpose of selling it afterwards.

However, the economists and governments are not yet decided whether to accept these form of cyber payments with some governments recognizing it while others are yet to decide.

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The RBI has come up with guidelines for opening smaller particular service oriented banks.

It has cleared the decks for two kinds of banks recently: Small Banks and Finance Banks.

Small Banks/ Small Finance Banks: The main aim of these banks will be to further the financial inclusion by functioning as a savings vehicle and also provide to MSE’s and other unorganized sector entities. These banks will have to have a sizable portion of their branches in the rural areas.These banks will have to maintain the same capital requirements of CRR and SLR as its mandatory for normal banks. The minimum paid up capital of these banks will be Rs. 100 crore. These banks will have the option to turn into full fledged banks in the future.

Payments Banks: The main of these banks will also be improving financial inclusion, however these banks will be primarily focusing on collection of deposits and the facilitation of payments and remittances to the customers. These banks won’t be allowed to provide any loans. They will try to provide the customers with low cost banking services and so invest heavily in the technological field. The minimum capital requirement will also be Rs. 100 crores.

Hopefully, we will be seeing the first Small Finance banks and Payment banks coming up in the country by the early 2015.

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NBFC or Non-Banking Financial Companies are those that undertake activities similar to banks but with some differences. These Companies are registered in India under the Companies Act, 1956. These companies undertake activities like giving of loans and advances, provide investment facilities, wealth management, sale or purchase of shares, insurance business, etc.

However, the most important difference between a Bank and an NBFC is that NBFC’s are debarred from collecting demand deposits from the public, they are not a part of the payment and settlement system, cannot avail the support of the Deposit Insurance and Credit Guarantee Corporation and not issue cheques in their name. They don’t hold banking licenses and therefore provide specific banking services. They are primarily designed to support the banking structure in an economy and complement it. Therefore to support their activities they have to find other sources like issuing debt instruments, getting listed on the stock exchange.

Many Micro Finance Institutions incorporate themselves as NBFC’s like its an easier route to get registered with the RBI and it also provides them with much more flexible options to enhance their business capabilities and not have a rigorous structure like a Bank.

The NBFC in India are regulated by the RBI. Recently the RBI has bought out more guidelines which have to be implemented by the NBFC’s like maintaining higher Tier-I capital and revised Non-Performing Asset norms.

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Recession: An economic crisis that affects one or more than one country.

Which organisation does Recession affect most mercilessly- The Banking Sector.

In view of the recent 2008 Global economic crisis which resulted in widespread recession across a lot of countries of the world, the Banking regulators are enforcing more tighter norms to protect the sector from future crisis and also provide them with enough teeth to fight the crisis.

The RBI has also undertaken a similar kind of measure by undertaking to identify Systematically Important Banks or SIB’s. These are those banks that are ‘too big to fail’. Under this measure the RBI will identify those banks whose failure can result in large scale disruptions of the economy.

According to the RBI these banks will be chosen based on the following parameters:

• Size
•  Interconnectedness
•  Lack of readily available substitutes or financial institution infrastructure
• Complexity

However, the parameter of ‘Size’ will be given the most weightage, like Banks having a size beyond 2% of GDP may be selected.

Under this, the selected banks will be asked to keep aside a part of their capital aside as a buffer stock, eg. the part may be determined as % of the loans given by the bank.

The RBI has not yet declared any names of any banks under this new directive, but its expected to come out soon.

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The Indian Banking Sector has seen a lot of changes in recent times. The Reserve Bank of India is committed to its goal to make the Indian Banking Sector strong enough to withstand the effects of the economic shocks that our economy may face due to increased interactions of the Global Economy. This was most evidently seen during the recent Sub-Prime Crisis that shock the world. The Indian Economy weathered the crisis comparatively much better than most of the developed countries and one of the primary reasons was the fundamentally string Indian Banking Sector.

However the current scenario in the Indian Banking Sector is also, that its very risk averse. This is one of the primary reasons that there are no Indian Banks among the top 10 Banks in the world not even in the top 50.

But, this might hopefully be changing given the new policies being undertaken by the RBI.

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We have all heard a lot about the positive effects of Internship. It helps to get you a better looking CV, makes you aware of the fields you are strong in, where you can have a better future prospect, etc. But, what is the most important contribution an internship has on your career????

Internship’s just don’t make your CV long and beautiful, but it helps to give the students a important exposure to the career life which we are going to embark on. It provides you the opportunity to increase your knowledge, apply the theoretical knowledge, opportunity to work with different people and gain very useful peer advice. These are something every student on the verge of embarking his/her career should try and do and gain the essential practical knowledge and improve upon our soft skills.

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